As filed with the Securities and Exchange Commission on January 12, 2010
Registration No. 333-157701
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
POST-EFFECTIVE
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
THE MONEY TREE INC.
(Exact name of registrant as specified in its charter)
| | | | |
| Georgia | | 6141 | | 58-2171386 |
(State or other jurisdiction of Incorporation of organization) | | (Primary Standard Industrial Classification Code Number) | | (I.R.S. Employer Identification Number) |
114 South Broad Street
Bainbridge, Georgia 39817
(229) 246-6536
(Address, including zip code, and telephone number, including area code, of registrant’s principal
executive offices)
Bradley D. Bellville
President
114 South Broad Street
Bainbridge, Georgia 39817
(229) 246-6536
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Michael K. Rafter, Esq.
Baker, Donelson, Bearman,
Caldwell & Berkowitz, PC
Monarch Plaza
Suite 1600
3414 Peachtree Road, NE
Atlanta, Georgia 30326
(404) 577-6000
Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. x
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the exchange Act. (Check one):
| | |
| Large accelerated filer ¨ | | Accelerated filer ¨ |
| Non-accelerated filer x | | Smaller reporting company ¨ |
(Do not check if a smaller reporting company)
THE MONEY TREE INC.
$75,000,000 Series B Variable Rate Subordinated Debentures
We are offering up to $75,000,000 in aggregate principal amount of our Series B Variable Rate Subordinated Debentures (Debentures) on a continuous basis. A minimum initial investment of $500 is required.
We will issue the Debentures in varying purchase amounts that we will establish each month. For each purchase amount, we will establish an interest rate and an interest adjustment period that may range from one year to four years. The established features will be available for each calendar month and will apply to all Debentures that we sell during that month. At the end of each interest adjustment period, the interest rate will automatically adjust to the then-current rate for that interest adjustment period. The interest rate for the new period could be lower than the interest rate for the previous period.
We will publish the established features in a newspaper of general circulation, and you may obtain the established features from our web site atwww.themoneytreeinc.com or by calling our executive offices in Bainbridge, Georgia at (877) 468-7878 (toll free) or (229) 248-0990. We will file a Rule 424(b)(2) prospectus supplement setting forth the established features with the Securities and Exchange Commission upon any change in the established features.
We are offering the Debentures through our designated selling officer, Dellhia “Cissie” Franklin, without an underwriter and on a continuous basis. We do not have to sell any minimum amount of Debentures to accept and use the proceeds of this offering. We cannot assure you that all or any portion of the Debentures we are offering will be sold. We have not made any arrangement to place any of the proceeds from this offering in an escrow, trust or similar account. Therefore, you will not be entitled to the return of your investment. The Debentures are not listed on any securities exchange, and there is no public trading market for the Debentures. Because it is very unlikely that any trading market will develop, we cannot assure you that you will be able to resell the Debentures at any price. We have the right to reject any subscription, in whole or in part, for any reason.
We may redeem the Debentures, upon at least 30 days’ written notice, at any time prior to maturity for a redemption price equal to the principal amount plus any unpaid interest thereon to the date of redemption. You may request redemption of the Debentures without penalty at the end of any interest adjustment period for a redemption price equal to the principal amount plus any unpaid interest thereon to the date of redemption. In addition, at your written request, we may, at our sole option, redeem your Debentures during any interest adjustment period for a redemption price equal to the principal amount plus interest thereon at the redemption date minus a 180-day interest penalty.
Regardless of the interest adjustment period you select, the Debentures mature four years from the date of issuance, subject to an automatic extension for one additional four-year period. However, you may request redemption of the Debenture at maturity by providing us with notice prior to 15 days after the original maturity date.If you do not provide notice of your intention to redeem the Debenture prior to the end of the 15th day, you will be required to maintain your investment in the Debenture beyond the original maturity date, and the interest rate on the extended Debenture may be lower than the interest rate previously being paid to you.
You should read this prospectus and any applicable prospectus supplement carefully before you invest in the Debentures. These Debentures are our general unsecured obligations and are subordinated in right of payment to all of our present and future senior debt. As of September 25, 2009, we had $77,076,045 of debt outstanding that ranks equal with or senior to the Debentures offered pursuant to this prospectus. We expect to incur additional debt in the future, including, without limitation, the Debentures offered pursuant to this prospectus.
The Debentures are not certificates of deposit or similar obligations guaranteed by any depository institution, and they are not insured by the Federal Deposit Insurance Corporation (FDIC) or any governmental or private insurance fund, or any other entity. We do not contribute funds to a separate account such as a sinking fund to use to repay the Debentures.
See “Risk Factors” beginning on page 11 for certain factors you should consider before buying the Debentures. These risks include the following:
| | • | | The Debentures are risky and speculative investments for suitable investors only. |
| | • | | Our independent registered public accounting firm’s fiscal year 2009 report includes an explanatory paragraph that states that we have suffered recurring losses from operations and have a net capital deficiency that raise substantial doubt about our ability to continue as a going concern. |
| | • | | The collectibility of our finance receivables has been severely and negatively affected by general economic conditions, and we have not been able to recover the full amount of delinquent accounts by resorting to the sale of collateral or receipt of non-filing insurance proceeds. |
| | • | | If we are unable to sell more debentures and demand notes than we redeem in any given period, our liquidity and capital resources will be severely and negatively affected. |
| | • | | We may be unable to meet our debenture and demand note obligations, which could force us to sell off our loan receivables and other operating assets or we might be forced to cease our operations, and you could lose some or all of your investment. |
| | • | | Our Debentures are not insured or guaranteed by the FDIC or any third party, so you are dependent upon our ability to manage our business and generate adequate cash flows. |
These securities have not been approved or disapproved by the SEC or any state securities commission, and neither the SEC nor any state securities commission has passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
| | | | | | |
| | | Price to Public | | Underwriting Discount
And Commission | | Proceeds
to Company |
Per Debenture | | 100% | | None | | 100% |
Total | | $75,000,000 | | None | | $75,000,000(1) |
| (1) | We will receive all of the net proceeds from the sale of the Debentures, which, if we sell all of the Debentures covered by this prospectus, we estimate will total approximately $74,385,000 after expenses. |
The date of this prospectus is January _____, 2010.
TABLE OF CONTENTS
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You should rely only upon the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell the Debentures only in jurisdictions where offers and sales are permitted.
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QUESTIONS AND ANSWERS
Below we have provided some of the more frequently asked questions and answers relating to the offering of the Debentures. Please see the “Prospectus Summary” and the remainder of this prospectus for more information about the offering of the Debentures.
| Q: | Who is The Money Tree Inc. (the Company)? |
| A: | We are a consumer finance company operating since our inception in 1987 through our branch offices in 102 locations throughout Georgia, Alabama, Louisiana and Florida. |
| Q: | What are your primary business activities? |
| A: | We primarily make, purchase and service direct consumer loans, consumer sales finance contracts and motor vehicle installment sales contracts. Direct consumer loans are direct loans to customers for general use, which are collateralized by existing automobiles or consumer goods, or are unsecured. Consumer sales finance contracts consist of retail installment sales contracts for purchases of specific consumer goods by customers either from one of our branch locations or from a retail store and are collateralized by such consumer goods. Motor vehicle installment sales contracts are initiated by us or purchased from automobile dealers subject to our credit approval. We originate direct consumer loans and consumer sales finance contracts primarily in our branch office locations. As of September 25, 2009, direct consumer loans comprised 32.9%, motor vehicle sales contracts comprised 44.6% and consumer sales finance contracts comprised 22.5% of the gross amount of our outstanding loans and contracts, excluding amounts in bankruptcy. Most of our customers have “subprime” credit ratings and are considered higher than average credit risks. We sell retail merchandise, principally furniture, appliances and electronics, at certain of our branch office locations and operate three used automobile dealerships in the State of Georgia. We also offer, among other products and services, credit and non-credit insurance products, prepaid phone services and automobile club memberships to our loan customers. Insurance products include credit life, credit accident and sickness, and collateral protection, which are issued by a non-affiliated insurance company. |
| Q: | What kind of offering is this? |
| A: | We are offering up to $75,000,000 of Debentures to residents of the State of Georgia. |
| A: | A Debenture is our promise to pay you a specified rate of interest for a specific period of time and to repay your principal investment upon maturity. The Debentures are our general unsecured obligations and are subordinated in right of payment to all of our present and future senior debt. Subordinated means that if we are unable to pay our debts |
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| | as they come due, all of the senior debt would be paid first, before any payment would be made on the Debentures. As of September 25, 2009, we had the following debt outstanding that ranks equal with or senior to the Debentures: |
| | | |
Senior debt | | $ | 326,517 |
Debentures | | | 73,602,821 |
Demand Notes | | | 3,146,707 |
| | | |
Total | | $ | 77,076,045 |
| | | |
We expect to incur additional debt in the future, including, without limitation, the Debentures offered pursuant to this prospectus.
| Q: | Is my investment in the Debentures insured? |
| A: | No.The Debentures are not certificates of deposit or similar obligations or guaranteed by any depository institution, and they are not insured by the FDIC or any governmental or private insurance fund, or any other entity. They are backed only by the faith and credit of our company and our operations. |
| Q: | How is the interest rate determined? |
| A: | The interest rate offered on the Debentures depends on which interest adjustment period you select. At the time of your initial investment, you will select an interest adjustment period of one year, two years or four years and the corresponding interest rate applicable to such interest adjustment period. During this period, your interest rate will not change. At the end of each interest adjustment period, the interest rate will automatically adjust to the then-current rate offered for that interest adjustment period. At such time, interest rates will at least be equal to the formula under the Minimum Rate subject to the Ceiling set forth in the table below: |
| | | | | |
Debenture | | Minimum Rate | | Ceiling | |
1 Year | | Prime Rate minus 4.0% | | 9.5 | % |
2 Year | | Prime Rate minus 3.5% | | 10.0 | % |
4 Year | | Prime Rate minus 2.0% | | 11.0 | % |
The Prime Rate shall be the prime rate published by The Wall Street Journal. See “When may I redeem the Debenture?”
| Q: | How is interest calculated and paid to me? |
| A: | Interest is compounded daily (based on a 365-day year). We will pay interest to you at any time or at specific intervals (monthly, quarterly, semi-annually or annually) at your request. If you do not request payment of interest prior to maturity, your investment in the Debentures will continue to grow as we will pay interest on the interest you would have received (sometimes referred to as “compounding”). |
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| Q: | When do the Debentures mature? |
| A: | Regardless of the interest adjustment period you select, the Debentures mature four years from the date of issuance, subject to an automatic extension for one additional four-year period. However, you may request redemption of the Debenture at maturity by providing us with notice prior to 15 days after the original maturity date.If you do not provide notice of your intention to redeem the Debenture prior to the end of the 15th day, you will be required to maintain your investment in the Debentures beyond the original maturity date, and the interest rate on the extended Debenture may be lower than the interest rate previously being paid to you. |
| Q: | When may I redeem the Debenture? |
| A: | You may redeem the Debenture at the end of any interest adjustment period without penalty by giving us notice of such redemption within 10 days after the end of the interest adjustment period. For example, if you select a one-year interest adjustment period, you will only be able to redeem without penalty at your option at the end of each one-year period. We will mail you notice of the new interest rate at least 20 days prior to the end of each interest adjustment period. Redemption at any other time will be subject to our consent in our sole discretion and a 180-day interest penalty, which means that you will not receive the last 180 days worth of interest during the applicable interest adjustment period, and if the last 180 days worth of interest are not sufficient to cover the amount of the penalty, then any remaining amount of the penalty shall be deducted from the principal amount of the Debenture. |
| Q: | Can you force me to redeem my Debenture? |
| A: | Yes, we may call your Debenture for redemption at any time upon 30 to 60 days’ notice for a price equal to the principal amount plus accrued interest to the date of redemption. |
| Q: | How are the Debentures sold? |
| A: | The Debentures are offered by our designated selling officer without an underwriter. We intend to market the offering primarily by placing advertisements in local newspapers, purchasing roadway sign advertisements and placing signs in our branch office locations in states in which we have properly registered the offering or qualified for an exemption from registration. |
| Q: | What will you do with the proceeds raised from this offering? |
| A: | If all the Debentures offered by this prospectus are sold, we expect to receive approximately $74,385,000 in net proceeds after deducting all costs and expenses associated with this offering. We intend to use substantially all of the net cash proceeds from this offering in the following order of priority: |
| | • | | to redeem (1) debentures and demand notes of our subsidiary, The Money Tree of Georgia Inc. and (2) Series A Variable Rate Subordinated Debentures, these Debentures and the Subordinated Demand Notes (Demand Notes) issued by us; |
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| | • | | to make interest payments to holders of all of our debentures and demand notes; |
| | • | | to the extent we have remaining net proceeds and adequate cash on hand, to fund the following activities: |
| | ¡ | | to make additional consumer loans; |
| | ¡ | | to fund the purchase of inventory of used cars; |
| | ¡ | | to open new branch office locations; |
| | ¡ | | to acquire loan receivables from competitors; and |
| | ¡ | | for working capital and other general corporate purposes. |
| Q: | What are some of the significant risks of my investment in the Debentures? |
| A: | You should carefully read and consider all risk factors beginning on page 11 of this prospectus prior to investing. Below is a summary of some of the significant risks of an investment in the Debentures: |
| | • | | the Debentures are risky and speculative investments for suitable investors only; |
| | • | | if we are unable to sell more debentures and demand notes than we redeem in any given period, our liquidity and capital needs will be severely and negatively affected; |
| | • | | if we are unable to repay or redeem the principal amount of debentures or demand notes when due, and we are unable to obtain additional financing or other sources of capital, we may be forced to sell off our loan receivables and other operating assets or we might be forced to cease our operations, and you could lose some or all of your investment; |
| | • | | we can provide no assurance that any of the Debentures will be sold or that we will raise sufficient proceeds to carry out our business plans; |
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| | • | | our Debentures are not insured or guaranteed by any third party, so you are dependent upon our ability to manage our business and generate adequate cash flows; |
| | • | | payment on the Debentures is subordinate to the payment of all outstanding present and future senior debt, and the indenture does not limit the amount of senior debt we may incur; |
| | • | | payment of interest and principal on the Debentures is effectively subordinate to the payment of the secured and unsecured creditors of our subsidiaries, including holders of debentures and demand notes issued by The Money Tree of Georgia Inc.; |
| | • | | if we default in our Debenture or Demand Note payment obligations, the indenture agreements relating to our Debentures and Demand Notes provide that the trustee could accelerate all payments due under the Debentures and Demand Notes, which would further negatively affect our financial position; |
| | • | | the Debentures contain an automatic extension feature which could result in the extension of the maturity of the Debentures beyond the original maturity date and a lower interest rate being paid; |
| | • | | if we find errors in our previously issued financial statements, we may choose to suspend our offerings of demand notes and debentures until such time as the financial misstatements can be corrected, and if correcting those errors requires an extended period of time, our ability to meet our financial obligations could be severely and negatively affected; |
| | • | | the indenture does not contain covenants restricting us from taking certain actions, and therefore the indenture provides very little protection of your investment; |
| | • | | there will not be any market for the Debentures, so you should only purchase them if you do not have any need for liquidity of your investment; |
| | • | | our independent registered public accounting firm’s fiscal year 2009 report includes an explanatory paragraph that states that we have suffered recurring losses from operations and have a net capital deficiency that raise substantial doubt about our ability to continue as a going concern; |
| | • | | we suffered significant losses during fiscal years 2008 and 2009 and we anticipate such losses will likely continue in 2010; |
| | • | | we suffered significant credit losses in 2008 and 2009 due to continued weakening economic conditions, and there is no guarantee such credit losses will not continue during this downturn in the economy or that our operations and profitability will not continue to be negatively affected; |
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| | • | | our significant shareholders’ deficit balance may limit our ability to obtain future financing, which could have a negative effect on our operations and our liquidity; |
| | • | | our lack of a significant line of credit could affect our liquidity; |
| | • | | the collectibility of our finance receivables has been severely and negatively affected by general economic conditions and we have not been able to recover the full amount of delinquent accounts by resorting to sale of collateral or receipt of non-filing insurance proceeds; |
| | • | | our typical customer base has “subprime” credit ratings and higher than average credit risks which has resulted in increased loan defaults; and |
| | • | | we are controlled by the Martin family and do not have any independent board members overseeing our operations. |
| Q: | Who may I contact for more information? |
| A: | While our branch office personnel would be happy to provide you with a prospectus and may accept your investment check and documentation, they are not allowed to answer any substantive questions about your investment. If you have questions about the offering of the Debentures or need additional information, please call our executive office at (877) 468-7878 (toll free) or (229) 248-0990 (in Georgia). |
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PROSPECTUS SUMMARY
This summary highlights selected information, most of which was not otherwise addressed in the “Questions and Answers” section of this prospectus. For more information about us, you should carefully read the entire prospectus, including the section entitled “Risk Factors,” the financial statements and other financial data, any related prospectus supplement and the documents we have referred you to in “Where You Can Find More Information.”
Our Company
We were incorporated in Georgia in 1987, and our principal corporate office is located at 114 South Broad Street, Bainbridge, Georgia 39817. Our general telephone number is (229) 246-6536. Information about us can be found atwww.themoneytreeinc.com. The information contained on this website is not part of this prospectus.
The Offering
| | |
| Securities Offered | | We are offering up to $75,000,000 in aggregate principal amount of our Debentures. The Debentures are governed by an indenture between us and U.S. Bank National Association, as trustee. The Debentures do not have the benefit of a sinking fund. See “Description of Debentures.” |
| |
| Denominations | | Established monthly by us. |
| |
| Minimum Investment | | A minimum initial investment of $500 is required. |
| |
| Interest Rate | | Monthly offering rate, compounded daily based on a 365-day year, for each established denomination. The interest rate offered on the Debentures varies depending on the interest adjustment period selected by you (one year, two years or four years). |
| |
| Interest Adjustment | | Rate adjusted at the end of each interest adjustment period to the then-current interest rate, compounded daily. At such time, interest rates will at least be equal to the formula under the Minimum Rate subject to the Ceiling set forth in the table below: |
| | | | | | | |
| | | Debenture | | Minimum Rate | | Ceiling | |
| | 1 Year | | Prime Rate minus 4.0% | | 9.5 | % |
| | 2 Year | | Prime Rate minus 3.5% | | 10.0 | % |
| | 4 Year | | Prime Rate minus 2.0% | | 11.0 | % |
| | |
| | The Prime Rate shall be the prime rate published by The Wall Street Journal. We will mail you notice of the new interest rate at least 20 days prior to the end of each interest adjustment period. |
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| | |
| |
| Payment of Interest | | Interest will be earned daily and will be payable at any time at your request. |
| |
| Maturity | | Four years from the date of issuance (subject to one automatic four-year extension). |
| |
| Notice of Extension | | We will provide you notice of the maturity date of your Debenture at least 30 days prior to the maturity date and inform you that your Debenture will be automatically extended unless you notify us otherwise. At this time, we will also provide you with an updated prospectus. |
| |
| Automatic Extension of Maturity | | Maturity of each Debenture isautomatically extended on its original terms for one additional four-year term subject to interest adjustment. You may prevent such extension by notifying us prior to 15 days after the maturity date that you would like to redeem your Debenture at maturity. |
| |
| Redemption by You | | You may redeem the Debenture at the end of any interest adjustment period without penalty by giving us notice within 10 days after the end of the interest adjustment period. Redemption at any other time will be subject to our consent in our sole discretion and a 180-day interest penalty. |
| |
| Redemption by Us | | We may redeem the Debentures at any time prior to maturity upon 30 to 60 days’ written notice to you for a price equal to principal plus interest accrued to the date of redemption. |
| |
| Subordination | | Debentures are subordinated, in all rights to payment and in all other respects, to all of our debt except for debt that by its terms expressly provides that such debt is not senior in right to payment of the Debentures. Senior debt includes, without limitation, all of our bank and finance company debt and any line of credit we may obtain in the future. This means that if we are unable to pay our debts when due, all of the senior debt would be paid first, before any payment would be made on the Debentures. |
| |
| Event of Default | | Under the indenture, an event of default is generally defined as (1) a default in the payment of principal or interest on the Debentures that is not cured for 30 days, (2) our becoming subject to certain events of bankruptcy or insolvency, or (3) our failure to comply with provisions of the Debentures or the indenture if such failure is not cured or waived within 60 days after receipt of a specific notice. |
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| | |
| |
| Transfer Restrictions | | Transfer of a Debenture is effective only upon the receipt of valid transfer instructions by the registrar from the Debenture holder of record. |
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| Trustee | | U.S. Bank National Association, a national banking association. |
| |
| Risk Factors | | See “Risk Factors” beginning on page 11 and other information included in this prospectus and any prospectus supplement for a discussion of factors you should carefully consider before investing in the Debentures. |
Summary Consolidated Financial Data
The following table summarizes certain financial data of our business. You should read this summary together with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and related notes included elsewhere in this prospectus. The summary balance sheet data as of September 25, 2009 and 2008, and the summary statement of operations data for the fiscal years ended September 25, 2009, 2008 and 2007, have been derived from our audited consolidated financial statements and related notes included in this prospectus. The summary balance sheet data as of September 25, 2007, 2006 and 2005, and the summary statement of operations data for the fiscal years ended September 25, 2006 and 2005, have been derived from our audited financial statements that are not included in this prospectus.
[Remainder of page intentionally left blank]
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| | | | | | | | | | | | | | | | | | | | |
| | | As of, and for, the Fiscal Year Ended September 25, | |
| Consolidated Operations Data | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
(in thousands except ratios) | | | | | | | | | | | | | | | | | | | | |
| | | | | |
Net interest and fee income(1) | | | 7,978 | | | | 11,005 | | | | 11,455 | | | | 12,698 | | | | 12,488 | |
Insurance commissions | | | 8,354 | | | | 9,615 | | | | 10,120 | | | | 11,263 | | | | 10,490 | |
Delinquency fees | | | 1,561 | | | | 1,720 | | | | 1,776 | | | | 1,565 | | | | 1,676 | |
Other income(2) | | | 2,132 | | | | 2,491 | | | | 2,698 | | | | 2,729 | | | | 2,434 | |
| | | | | | | | | | | | | | | | | | | | |
Net revenues before retail sales | | | 10,395 | | | | 11,019 | | | | 21,066 | | | | 23,518 | | | | 24,320 | |
Gross margin on retail sales | | | 5,653 | | | | 6,033 | | | | 6,832 | | | | 6,361 | | | | 5,703 | |
| | | | | | | | | | | | | | | | | | | | |
Net revenues | | | 16,048 | | | | 17,052 | | | | 27,898 | | | | 29,879 | | | | 30,023 | |
Operating expenses | | | (28,426 | ) | | | (28,469 | ) | | | (27,604 | ) | | | (29,151 | ) | | | (29,205 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net operating income (loss) | | | (12,378 | ) | | | (11,417 | ) | | | 294 | | | | 728 | | | | 818 | |
Other non-operating income | | | - | | | | - | | | | - | | | | 151 | | | | - | |
Loss on sale of property and equipment | | | (11 | ) | | | (21 | ) | | | (19 | ) | | | (75 | ) | | | (81 | ) |
| | | | | | | | | | | | | | | | | | | | |
Income (loss) before income tax benefit (expense) | | | (12,389 | ) | | | (11,439 | ) | | | 275 | | | | 804 | | | | 737 | |
Income tax benefit (expense) | | | 438 | | | | (528 | ) | | | 101 | | | | (274 | ) | | | (304 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (11,951 | ) | | $ | (11,966 | ) | | $ | 376 | | | $ | 530 | | | $ | 433 | |
| | | | | | | | | | | | | | | | | | | | |
Ratio of earnings to fixed charges(3) | | | (4 | ) | | | (4 | ) | | | 1.03 | | | | 1.10 | | | | 1.10 | |
Cash and cash equivalents | | $ | 2,922 | | | $ | 12,541 | | | $ | 17,854 | | | $ | 12,920 | | | $ | 9,619 | |
Finance receivables, net(5) | | | 56,283 | | | | 67,730 | | | | 75,838 | | | | 76,658 | | | | 74,660 | |
Other receivables | | | 717 | | | | 957 | | | | 861 | | | | 1,013 | | | | 1,099 | |
Inventory | | | 2,202 | | | | 3,167 | | | | 3,057 | | | | 2,195 | | | | 2,402 | |
Property and equipment, net | | | 4,227 | | | | 4,906 | | | | 4,220 | | | | 4,581 | | | | 4,850 | |
Total assets | | | 68,181 | | | | 91,800 | | | | 105,784 | | | | 101,487 | | | | 96,005 | |
Senior debt | | | 327 | | | | 695 | | | | 512 | | | | 669 | | | | 1,186 | |
Subordinated debt | | | - | | | | - | | | | - | | | | 600 | | | | 1,000 | |
Debentures(6) | | | 73,603 | | | | 82,209 | | | | 81,861 | | | | 77,910 | | | | 68,905 | |
Demand notes(6) | | | 3,147 | | | | 3,658 | | | | 5,991 | | | | 8,137 | | | | 12,867 | |
Shareholders’ deficit | | $ | (24,847 | ) | | $ | (12,896 | ) | | $ | (930 | ) | | $ | (1,305 | ) | | $ | (1,835 | ) |
| (1) | Net of interest expense and provision for credit losses. |
| (2) | Includes commissions from motor club memberships received from Interstate Motor Club, Inc., an affiliated entity, and income from income tax return preparation services received from Cash Check Inc. of Ga., a previously affiliated entity that was dissolved in December 2007. |
| (3) | The ratio of earnings to fixed charges represents the number of times fixed charges are covered by earnings. For purposes of this ratio, “earnings” is determined by adding pre-tax income to “fixed charges,” which consists of interest on all indebtedness and an interest factor attributable to rent expense. |
| (4) | Calculation results in a deficiency in the ratio (i.e., less than one-to-one coverage). The deficiency in earnings to cover fixed charges was $12,388,726 for the fiscal year ended September 25, 2009 and $11,438,560 for the fiscal year ended September 25, 2008. |
| (5) | Net of unearned insurance commissions, unearned finance charges, unearned discounts and allowance for credit losses. |
| (6) | Issued, in part, by our subsidiary, The Money Tree of Georgia Inc. See Note 7 to our audited financial statements for the year ended September 25, 2009. |
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RISK FACTORS
Our operations and your investment in the Debentures are subject to a number of risks. You should carefully read and consider these risks, together with all other information in this prospectus, before you decide to buy the Debentures. If any of the following risks actually occur, our business, financial condition or operating results and our ability to repay the Debentures could be materially adversely affected.
Risks Related to Our Offering
The Debentures are risky and speculative investments for suitable investors only.
You should be aware that the Debentures are risky and speculative investments suitable only for investors of adequate financial means. If you cannot afford to lose your entire investment, you should not invest in the Debentures. Potential investors are required to complete a purchaser suitability questionnaire to assist our executive officers in determining whether an investment in the Debentures is a suitable investment, and such executive officers have the right to reject any potential investor. If we accept an investment, you should not assume that the Debentures are a suitable and appropriate investment for you.
If we are unable to sell more debentures and demand notes than we redeem in any given period, our liquidity and capital needs will be severely and negatively affected.
Since 2005, we or our subsidiary, The Money Tree of Georgia Inc., have sold approximately $57.0 million of debentures and $20.0 million of demand notes. We are substantially reliant upon the net offering proceeds we receive from the sale of our debentures and demand notes to meet our liquidity needs. We use these net offering proceeds to fund redemption obligations, make interest payments and to fund other working capital. For the fiscal year ended September 25, 2009, we redeemed $18.6 million in debentures, while only receiving $10.0 million from the sale of new debentures. If we are unable to sell more debentures and demand notes than we redeem in any given period, our liquidity and capital needs will be severely and negatively affected.
If we are unable to repay or redeem the principal amount of debentures or demand notes when due, and we are unable to obtain additional financing or other sources of capital, we may be forced to sell off our loan receivables and other operating assets or we might be forced to cease our operations, and you could lose some or all of your investment.
In addition to the Debentures we issue pursuant to this prospectus, we may issue demand notes, debentures, or similar debt instruments to investors in order to raise funds for our operations. As of September 25, 2009, we had a total of $73,602,821 of debentures and $3,146,707 of demand notes outstanding, which demand notes may be redeemed by our investors at any time. Of this amount, our subsidiary, The Money Tree of Georgia Inc., has issued $30,730,844 of debentures and $441,747 of demand notes. While the maturing debentures of our subsidiary are subject to substantially similar early redemption and automatic extension provisions as the debentures, we cannot predict with any accuracy the number of debenture holders who will elect to redeem such debentures at or prior to maturity. We intend to pay these and any other redemption obligations using our normal cash sources, such as collections on
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finance receivables and used car sales, as well as proceeds from the sale of the debentures and demand notes. We are substantially reliant upon the net offering proceeds we receive from the sale of the debentures and demand notes. However, during the fiscal year ended September 25, 2009, we redeemed $18.6 million in debentures, while only receiving $10.0 million from the sale of new debentures. Therefore, we have had to use funds from operations to fund these net redemptions. Our operations and other sources of funds may not provide sufficient available cash flow to meet our continued redemption obligations if the amount of redemptions continues at its current pace and we continue to suffer losses and use funds from operations to fund redemptions. If we are unable to repay or redeem the principal amount of debentures or demand notes when due, and we are unable to obtain additional financing or other sources of capital, we may be forced to sell off our loan receivables and other operating assets or we might be forced to cease our operations, and you could lose some or all of your investment.
We can provide no assurance that any Debentures will be sold or that we will raise sufficient proceeds to carry out our business plans.
We are offering the Debentures through our designated selling officer without a firm underwriting commitment. While we intend to sell up to $75,000,000 in principal amount of Debentures, there is no minimum amount of proceeds that must be received from the sale of the Debentures in order to accept proceeds from the Debentures actually sold. Accordingly, we can provide no assurance about the total principal amount of Debentures that will be sold. Therefore, we cannot assure you that we will raise sufficient proceeds to carry out our business plans.
Our Debentures are not insured or guaranteed by any third party, so you are dependent upon our ability to manage our business and generate adequate cash flows.
Our Debentures are not insured or guaranteed by the FDIC, any governmental agency or any other public or private entity as are certificates of deposit or other accounts offered by banks, savings and loan associations or credit unions. You are dependent upon our ability to effectively manage our business to generate sufficient cash flow, including cash flow from our financing activities, for the repayment of principal at maturity and the ongoing payment of interest on the Debentures. During 2008 and 2009, we incurred significant losses and we have used substantial amounts of operating cash flows to fund redemptions of debentures and demand notes. If these trends continue, you could lose your entire investment.
Our operations are not subject to the stringent banking regulatory requirements designed to protect investors, so your investment is completely dependent upon our successful operation of our business.
Our operations are not subject to the stringent regulatory requirements imposed upon the operations of commercial banks, savings banks and thrift institutions and are not subject to periodic compliance examinations by federal banking regulators. Therefore, an investment in our Debentures does not have the regulatory protections that the holder of a demand account or a certificate of deposit at a bank does. The return on your investment is completely dependent upon our successful operation of our business. To the extent that we do not successfully operate our business, our ability to pay interest and principal on the Debentures will be impaired.
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There is no sinking fund to ensure repayment of the Debentures at maturity, so you are totally reliant upon our ability to generate adequate cash flows.
We do not contribute funds to a separate account, commonly known as a sinking fund, to repay the Debentures upon maturity. Because funds are not set aside periodically for the repayment of the Debentures over their term, you must rely on our cash flow from operations and other sources of financing for repayment, such as funds from the sale of the Debentures and Demand Notes and credit facilities, if any. To the extent cash flow from operations and other sources are not sufficient to repay the Debentures, you may lose all or a part of your investment.
An increase in market interest rates may result in a reduction in our liquidity and increased losses or delay in our return to profitability and impair our ability to pay interest and principal on our debentures and demand notes.
Interest rates are currently at or near historic lows. Sustained, significant increases in interest rates could unfavorably impact our liquidity and increase our losses or delay our return to profitability by reducing the interest rate spread between the rate of interest we receive on loans and interest rates we must pay under our demand notes and debentures and any bank debt we incur. Any reduction in our liquidity and increase in our losses or delay in our return to profitability would diminish our ability to pay interest and principal on the Debentures.
Payment on the Debentures is subordinate to the payment of all outstanding present and future senior debt, and the indenture does not limit the amount of senior debt we may incur.
The Debentures are subordinate and junior to any and all of our senior debt. There are no restrictions in the indenture regarding the amount of senior debt or other indebtedness that we or our subsidiaries may incur. Upon the maturity of our senior debt, by lapse of time, acceleration or otherwise, the holders of our senior debt have first right to receive payment in full prior to any payments being made to you as a Debenture holder. Therefore, you would only be repaid if funds remain after the repayment of our senior debt. As of September 25, 2009, we had $326,517 of senior debt outstanding.
Payment of interest and principal on the Debentures is effectively subordinate to the payment of the secured and unsecured creditors of our subsidiaries, including holders of debentures and demand notes issued by The Money Tree of Georgia Inc.
Substantially all of our assets and operations are conducted through our subsidiaries. As a result, all the creditors of our subsidiaries, including the holders of the demand notes and debentures issued by The Money Tree of Georgia Inc., would be paid prior to our subsidiaries being allowed to distribute any amounts to us. As of September 25, 2009, $441,747 of demand notes and $30,730,844 of debentures issued by The Money Tree of Georgia Inc. were outstanding. If our subsidiaries did not have sufficient funds to pay their debts, our ability to pay interest and principal on the Debentures would be impaired.
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If we default in our Debenture or Demand Note payment obligations, the indenture agreements relating to our Debentures and Demand Notes provide that the trustee could accelerate all payments due under the Debentures and Demand Notes, which would further negatively affect our financial position.
Our obligations with respect to the Debentures and Demand Notes are governed by the terms of indenture agreements with U.S. Bank National Association, as trustee. Under the indentures, in addition to other possible events of default, if we fail to make a payment of principal or interest under any Debenture or Demand Note and this failure is not cured within 30 days, we will be deemed in default. Upon such a default, the trustee or holders of 25% in principal of the outstanding Debentures or Demand Notes could declare all principal and accrued interest immediately due and payable. Since our total assets do not cover these debt payment obligations, we would most likely be unable to make all payments under the Debentures or Demand Notes when due, and we might be forced to cease our operations.
The indenture does not contain covenants restricting us from taking certain actions, and therefore the indenture provides very little protection of your investment.
The Debentures do not have the benefit of extensive covenants. The covenants in the indenture are not designed to protect your investment if there is a material adverse change in our financial condition or results of operations. For example, the indenture does not contain any restrictions on our ability to create or incur senior debt or other debt or to pay dividends or any financial covenants (such as a fixed charge coverage or minimum net worth covenants) to help ensure our ability to pay interest and principal on the Debentures. The indenture does not contain provisions that permit Debenture holders to require that we redeem the Debentures if there is a takeover, recapitalization or similar restructuring. In addition, the indenture does not contain covenants specifically designed to protect you if we engage in a highly leveraged transaction. Therefore, the indenture provides very little protection of your investment.
The Debentures contain an automatic extension feature, which could result in the extension of the maturity of the Debentures beyond the original maturity date and a lower interest rate being paid.
The Debentures contain an automatic extension provision that extends the maturity date of the Debentures and resets the interest rate to the then-current rate unless you provide us with written notice prior to 15 days after the maturity date of the Debenture stating that you want your Debenture redeemed as of the maturity date. The term of the extended Debenture will be equal to the original term of the Debenture, and the interest rate on the Debenture will be equal to the interest rate we are then paying on Debentures of a like interest adjustment period. Therefore, if you fail to take action, you will be required to maintain your investment in the Debenture beyond the original maturity date of the Debenture, and the interest rate on the extended Debenture may be lower than the interest rate previously being paid to you.
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Our internal controls over financial reporting may not be effective in preventing or detecting misstatements in our financial statements, and if we fail to detect material misstatements in our financial statements, our financial condition and operating results could be severely and negatively affected.
During our fiscal year ended September 25, 2008, we concluded that our system of internal controls over financial reporting contained a material weakness and was not operating effectively. This resulted in errors in our previously issued quarterly financial statements. There can be no assurance that in the future our system of internal controls would detect misstatements in our financial statements. If we fail to detect material misstatements in our financial statements in the future, our financial condition and operating results could be severely and negatively affected.
If we find errors in our previously issued financial statements, we may choose to suspend our offerings of demand notes and debentures until such time as the financial misstatements can be corrected, and if correcting those errors requires an extended period of time, our ability to meet our financial obligations could be severely and negatively affected.
On November 18, 2008, we concluded that the previously issued unaudited consolidated financial statements contained in our Quarterly Reports on Form 10-Q, for each of the first three quarters for fiscal year 2008, should no longer be relied upon because of an error in the statements. We subsequently filed amended Quarterly Reports on Form 10-Q to accurately reflect our restated financial position and results of operations, and we terminated our public offerings of Series A Variable Rate Subordinated Debentures (SEC File No. 333-122531) and Subordinated Demand Notes (SEC File No. 333-122533), which offerings were set to expire under SEC rules on December 1, 2008. The error in the financial statements was, in part, caused by a material weakness in our internal control over financing reporting. In the future, if we conclude that our previously issued financial statements contain errors and cannot be relied upon, we may suspend the sale of debentures and demand notes under our current offerings until such time as the errors are corrected. If correcting these errors requires an extended period of time, our ability to meet our financial obligations could be severely and negatively affected.
There will not be any market for the Debentures, so you should only purchase them if you do not have any need for liquidity of your investment.
The Debentures will not be listed on a national securities exchange or authorized for quotation on the NASDAQ Stock Market. Further, it is very unlikely that any trading market for the Debentures will develop. Except as described elsewhere in this prospectus, you have no right to require redemption of the Debentures, and there is no assurance that the Debentures will be readily accepted as collateral for loans. Due to the lack of a market for the Debentures, we cannot assure you that you would be able to sell the Debentures. You should only purchase these Debentures if you do not have the need for liquidity for the amount invested in, and the interest payable on, the Debentures.
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If we redeem the Debentures, you may not be able to reinvest the proceeds at comparable rates.
We may redeem, at our option, at any time, all or a portion of the outstanding Debentures for payment prior to their maturity. However, you may only redeem your Debenture at your option and without penalty at the end of each applicable interest adjustment period. In addition, while the Debentures contain an automatic extension provision, we may nevertheless elect to redeem your debenture in full upon maturity. In the event we elect to redeem your Debenture, you would have the risk of reinvesting the proceeds at the then-current market rates, which may be higher or lower.
Risks Related to Our Business
Our independent registered public accounting firm’s fiscal year 2009 report includes an explanatory paragraph that states that we have suffered recurring losses from operations and have a net capital deficiency that raise substantial doubt about our ability to continue as a going concern.
Our independent registered public accounting firm’s report for the fiscal year ended September 25, 2009, which is included with our audited consolidated financial statements and related notes included in this prospectus, includes an explanatory paragraph that states that we have suffered recurring losses from operations and have a net capital deficiency that raise substantial doubt about our ability to continue as a going concern. If we cannot generate sufficient cash flow to meet our obligations on a timely basis through the sale of Debentures and Demand Notes and collections from our customers, originate new loans, and ultimately attain profitable operations, there can be no assurance that we will be able to continue as a going concern. See “Summary of Significant Accounting Policies – Basis of Financial Statement Presentation” in Note 2 to our Consolidated Financial Statements.
We suffered significant losses during fiscal years 2008 and 2009 and we anticipate such losses will likely continue in 2010.
Our net losses were approximately $12.0 million during both fiscal years 2008 and 2009. We anticipate that such significant losses will likely continue in 2010.
We suffered significant credit losses in 2008 and 2009 due to continued weakening economic conditions, and there is no guarantee such credit losses will not continue during this downturn in the economy or that our operations and profitability will not continue to be negatively affected.
Because our business consists mainly of making loans to individuals who depend on their earnings to make their repayments, our ability to operate on a profitable basis depends to a large extent on the continued employment of those individuals and their ability to meet their financial obligations as they become due. In the current recession and continued downturn in the U.S. and local economies in which we operate, our customers have been affected by the resulting unemployment and increases in the number of personal bankruptcies. Therefore, we continue to experience increased credit losses and our collection ratios and profitability could continue to be materially and adversely affected. This recession has negatively affected our customers’ disposable income, confidence and spending patterns and preferences, which in turn are negatively impacting our sales of consumer goods and vehicles and our customers’ ability to repay their obligations to us. As a result, we continue to experience significant credit losses through loan charge-offs. For the fiscal year ended September 25, 2009, our charge-offs, net of recoveries, for our entire loan portfolio were $11.1 million, or 15.8% of average net finance receivables, and charge-offs for the direct consumer loans and consumer sales finance contract segments were 20.7% of the related average receivables. These high levels of charge-offs have had a negative impact on our operations and profitability. Should the current economic conditions continue or worsen, our operations and profitability will continue to be materially and adversely affected.
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Our significant shareholders’ deficit balance may limit our ability to obtain future financing, which could have a negative effect on our operations and our liquidity.
As of September 25, 2009, we had a shareholders’ deficit of $24,847,259, which means our total liabilities greatly exceed our total assets. Bankruptcy law defines this as balance sheet insolvency. The existence of a significant shareholders’ deficit may limit our ability to obtain future debt or equity financing. If we are unable to obtain financing in the future, it will likely have a negative effect on our operations and our liquidity and our ability to continue as a going concern.
Our lack of a significant line of credit could affect our liquidity.
We have operated without a significant line of credit for the past several years. We have been seeking for several months to obtain a line of credit as an additional source of long-term financing. If we fail to obtain a line of credit, we will be more dependent on the proceeds from the debentures and demand notes for our continued liquidity. Since our sales of the debentures and demand notes have been significantly curtailed, our failure to obtain a line of credit would negatively affect our ability to meet our obligations.
The collectibility of our finance receivables has been severely and negatively affected by general economic conditions and we have not been able to recover the full amount of delinquent accounts by resorting to sale of collateral or receipt of non-filing insurance proceeds.
Our liquidity is dependent on, among other things, the collection of our finance receivables. We continually monitor the delinquency status of our finance receivables and promptly institute collection efforts on delinquent accounts. Collections of our consumer finance receivables have been severely and negatively affected by general economic conditions. Since we do not ordinarily perfect our security interest in collateral for loans, we have not been able to recover the full amount of outstanding receivables by resorting to the sale of collateral or receipt of non-filing insurance proceeds.
Our typical customer base has “subprime” credit ratings and higher than average credit risks which has resulted in increased loan defaults.
We typically lend money to individuals who have difficulty receiving loans from banks and other financial institutions because of credit problems or other adverse financial circumstances. Therefore, we have a higher risk of loan default among our customers than other lending companies. If we continue to suffer increased loan defaults, our operations will be materially adversely affected, and we may have difficulty making our principal and interest payments on the Debentures.
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Hurricanes or other adverse weather events could negatively affect local economies or cause disruption to our branch office locations, which could have an adverse effect on our business or results of operations.
Our operations are conducted in the States of Georgia, Florida, Alabama and Louisiana, including areas susceptible to hurricanes or tropical storms. Such weather events can disrupt our operations, result in damage to our branch office locations and negatively affect the local economies in which we operate. We cannot predict whether or to what extent future hurricanes will affect our operations or the economies in our market areas, but such weather events could result in a decline in loan originations and an increase in the risk of delinquencies, foreclosures or loan losses. Our business or results of operations may be adversely affected by these and other negative effects of future hurricanes.
Additional competition may decrease our liquidity and profitability, which would adversely affect our ability to repay the Debentures.
We compete for business with a number of large national companies and banks that have substantially greater resources, lower cost of funds, and a more established market presence than we have. If these companies increase their marketing efforts to include our market niche of borrowers, or if additional competitors enter our markets, we may be forced to reduce our interest rates and fees in order to maintain or expand our market share. Any reduction in our interest rates or fees could have an adverse impact on our liquidity and profitability and our ability to repay the Debentures.
We are subject to many laws and governmental regulations, and any changes in these laws or regulations may materially adversely affect our financial condition and business operations.
Our operations are subject to regulation by federal authorities and state banking, finance, consumer protection and insurance authorities and are subject to various laws and judicial and administrative decisions imposing various requirements and restrictions on our operations which, among other things, require that we obtain and maintain certain licenses and qualifications, and limit the interest rates, fees and other charges we may impose in our consumer finance business. Although we believe we are in compliance in all material respects with applicable laws, rules and regulations, we cannot assure you that we are or that any change in such laws, or in the interpretations thereof, will not make our compliance with such laws more difficult or expensive or otherwise adversely affect our financial condition or business operations.
We are devoting resources to comply with various provisions of the Sarbanes-Oxley Act, including Section 404 relating to internal controls testing and auditor attestation, and this may reduce the resources we have available to focus on our core business.
We are subject to the requirements of Section 404(A) of the Sarbanes-Oxley Act, and in order to ensure compliance with the various provisions of the Sarbanes-Oxley Act, we have evaluated our internal controls over financial reporting to allow management to report on our internal controls systems. Among other things, we may not be able to conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404. In addition, beginning with the fiscal year ending September 25, 2010, our independent registered public accounting firm will be required to attest to our internal controls
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systems and may not be able or willing to issue a favorable assessment of our internal controls over financial reporting. Any failure to comply with the various requirements of the Sarbanes-Oxley Act may require significant management time and expenses, and divert attention or resources away from our core business.
We are controlled by the Martin family and do not have any independent board members overseeing our operations.
Our board of directors consists of Bradley D. Bellville, our President, and Jefferey V. Martin. We do not have any independent directors on our board. In addition, The Vance R. Martin Family Trust owns a majority of the outstanding shares of our voting capital stock. While W. Derek Martin, our former Chairman, is no longer an officer or actively involved in our operations, he serves as the sole trustee of the Trust. Therefore, the Martin family will be able to exercise significant control over our affairs, including the election of directors.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of federal securities law. Words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “continue,” “predict,” or other similar words identify forward-looking statements. Forward-looking statements appear in a number of places in this prospectus, including, without limitation, “Use of Proceeds” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and they include statements regarding our intent, belief or current expectation about, among other things, trends affecting the markets in which we operate, our business, our financial condition and our growth strategies. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those predicted in the forward-looking statements as a result of various factors, including those set forth in the “Risk Factors” section of this prospectus. If any of the events described in “Risk Factors” occur, they could have an adverse effect on our business, financial condition and results of operations. When considering forward-looking statements, you should keep these risk factors, as well as the other cautionary statements in this prospectus, in mind. You should not place undue reliance on any forward-looking statement. We are not obligated to update forward-looking statements.
USE OF PROCEEDS
If we sell all of the Debentures offered by this prospectus, we estimate that the net proceeds will be approximately $74,385,000 after deduction of estimated offering expenses of $615,000. We will pay all of the expenses related to this offering.
We will receive cash proceeds in varying amounts from time to time as the Debentures are sold. Due to our inability to predict with any certainty whatsoever the amount of offering proceeds we will receive from the sale of the Debentures or when holders of the Debentures will redeem or which holders of other demand notes or debentures will redeem at or prior to maturity, we cannot provide any specific allocation of proceeds we will use for any particular purpose. However, we intend to use substantially all of the net offering proceeds in the following order of priority:
| | • | | to redeem (1) debentures listed in the maturity date table below and any other debentures and demand notes of our subsidiary, The Money Tree of Georgia Inc., and (2) the Series A Variable Rate Subordinated Debentures, the Debentures offered in this offering and Demand Notes issued by us; |
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| | • | | to make interest payments to holders of all of our debentures and demand notes; |
| | • | | to the extent that net proceeds remain and we have adequate cash on hand, to fund the following company activities: |
| | ¡ | | to make additional consumer loans; |
| | ¡ | | to fund the purchase of inventory of used cars; |
| | ¡ | | to open new branch office locations; |
| | ¡ | | to acquire loan receivables from competitors; and |
| | ¡ | | for working capital and other general corporate purposes. |
Although we are unable to predict with any certainty when holders of the Debentures will redeem or which holders of other demand notes or debentures will redeem, below is a schedule showing the scheduled maturity dates (i.e., debentures which have reached their extended eight-year maturity dates) of the debentures issued by our subsidiary, The Money Tree of Georgia Inc. over the next several years. We anticipate primarily using net proceeds from this offering of the Debentures to fund the below scheduled redemptions of the debentures of our subsidiary, The Money Tree of Georgia Inc., and any other redemptions that occur prior to the scheduled maturity dates.
The Money Tree of Georgia Inc.
| | |
Debentures Maturity Schedule | | 8-Year Maturities |
1/2010 thru 12/2010 | | 7,482,350 |
1/2011 thru 12/2011 | | 8,485,674 |
1/2012 thru 12/2012 | | 8,815,742 |
1/2013 thru 12/2013 | | 9,523,131 |
| | |
Total | | 34,306,897 |
There is no minimum number or amount of Debentures that we must sell to receive and use the proceeds from the sale of the Debentures, and we cannot assure you that all or any portion of the Debentures will be sold. In the event that we do not raise sufficient proceeds from our offerings of the Debentures and Debentures to adequately fund our operations, we could curtail the amount of funds we loan to our customers and focus on cash collections to increase cash flow. Please see “Risk Factors – Risks Related to Our Offering – If we are unable to sell more debentures and demand notes than we redeem in any given period, our liquidity and capital
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needs will be severely and negatively affected,” “Risk Factors – Risks Related to Our Offering – We can provide no assurance that any Debentures will be sold or that we will raise sufficient proceeds to carry out our business plans,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and related notes included elsewhere in this prospectus. The selected consolidated balance sheet data, as of September 25, 2009 and 2008, and the selected consolidated statement of operations data, for the fiscal years ended September 25, 2009, 2008 and 2007, have been derived from our audited consolidated financial statements and related notes included in this prospectus. The selected consolidated balance sheet data, as of September 25, 2007, 2006, and 2005, and the selected consolidated statement of operations data, for the fiscal year ended September 25, 2006 and 2005, have been derived from our audited financial statements that are not included in this prospectus.
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| | | | | | | | | | | | | | | | | | | | |
| | | As of, and for, the Fiscal Year Ended September 25, | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Interest and fee income | | $ | 15,589 | | | $ | 19,280 | | | $ | 19,481 | | | $ | 20,048 | | | $ | 18,843 | |
Interest expense | | | (7,611 | ) | | | (8,275 | ) | | | (8,026 | ) | | | (7,350 | ) | | | (6,355 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net interest and fee income before provision for credit losses | | | 7,978 | | | | 11,005 | | | | 11,455 | | | | 12,698 | | | | 12,488 | |
Provision for credit losses | | | (9,630 | ) | | | (13,812 | ) | | | (4,983 | ) | | | (4,737 | ) | | | (2,768 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net revenue (loss) from interest and fees after provision for credit losses | | | (1,652 | ) | | | (2,807 | ) | | | 6,472 | | | | 7,961 | | | | 9,720 | |
Insurance commissions | | | 8,354 | | | | 9,615 | | | | 10,120 | | | | 11,263 | | | | 10,490 | |
Commissions from motor club memberships(1) | | | 1,602 | | | | 1,844 | | | | 1,947 | | | | 1,957 | | | | 1,475 | |
Delinquency fees | | | 1,561 | | | | 1,720 | | | | 1,776 | | | | 1,565 | | | | 1,676 | |
Income tax service income(2) | | | - | | | | - | | | | 3 | | | | 83 | | | | 162 | |
Other income | | | 530 | | | | 647 | | | | 748 | | | | 689 | | | | 797 | |
| | | | | | | | | | | | | | | | | | | | |
Net revenues before retail sales | | | 10,395 | | | | 11,019 | | | | 21,066 | | | | 23,518 | | | | 24,320 | |
Retail sales | | | 16,019 | | | | 17,164 | | | | 19,002 | | | | 17,972 | | | | 15,061 | |
Cost of sales | | | (10,366 | ) | | | (11,131 | ) | | | (12,170 | ) | | | (11,611 | ) | | | (9,358 | ) |
| | | | | | | | | | | | | | | | | | | | |
Gross margin on retail sales | | | 5,653 | | | | 6,033 | | | | 6,832 | | | | 6,361 | | | | 5,703 | |
Net revenues | | | 16,048 | | | | 17,052 | | | | 27,898 | | | | 29,879 | | | | 30,023 | |
Operating expenses | | | (28,426 | ) | | | (28,469 | ) | | | (27,604 | ) | | | (29,151 | ) | | | (29,205 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net operating income (loss) | | | (12,378 | ) | | | (11,417 | ) | | | 294 | | | | 728 | | | | 818 | |
Other non-operating income | | | - | | | | - | | | | - | | | | 151 | | | | - | |
Loss on sale of property and equipment | | | (11 | ) | | | (21 | ) | | | (19 | ) | | | (75 | ) | | | (81 | ) |
| | | | | | | | | | | | | | | | | | | | |
Income (loss) before income tax benefit (expense) | | | (12,389 | ) | | | (11,439 | ) | | | 275 | | | | 804 | | | | 737 | |
Income tax benefit (expense) | | | 438 | | | | (528 | ) | | | 101 | | | | (274 | ) | | | (304 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (11,951 | ) | | $ | (11,966 | ) | | $ | 376 | | | $ | 530 | | | $ | 433 | |
| | | | | | | | | | | | | | | | | | | | |
Ratio of earnings to fixed charges(3) | | | (4 | ) | | | (4 | ) | | | 1.03 | | | | 1.10 | | | | 1.10 | |
Cash and cash equivalents | | $ | 2,922 | | | $ | 12,541 | | | $ | 17,854 | | | $ | 12,920 | | | $ | 9,619 | |
Finance receivables(5) | | | 63,715 | | | | 76,606 | | | | 79,549 | | | | 79,797 | | | | 77,292 | |
Allowance for credit losses | | | (7,432 | ) | | | (8,876 | ) | | | (3,711 | ) | | | (3,139 | ) | | | (2,632 | ) |
| | | | | | | | | | | | | | | | | | | | |
Finance receivables, net | | | 56,283 | | | | 67,730 | | | | 75,838 | | | | 76,658 | | | | 74,660 | |
Other receivables | | | 717 | | | | 957 | | | | 861 | | | | 1,013 | | | | 1,099 | |
Inventory | | | 2,202 | | | | 3,167 | | | | 3,057 | | | | 2,195 | | | | 2,402 | |
Property and equipment, net | | | 4,227 | | | | 4,906 | | | | 4,220 | | | | 4,581 | | | | 4,850 | |
Total assets | | | 68,181 | | | | 91,800 | | | | 105,784 | | | | 101,487 | | | | 96,005 | |
Senior debt | | | 327 | | | | 695 | | | | 512 | | | | 669 | | | | 1,186 | |
Senior subordinated debt | | | - | | | | - | | | | - | | | | 600 | | | | 1,000 | |
Subordinated debt, related parties | | | - | | | | - | | | | - | | | | 370 | | | | 800 | |
Debentures(6) | | | 73,603 | | | | 82,209 | | | | 81,861 | | | | 77,910 | | | | 68,905 | |
Demand notes(6) | | | 3,147 | | | | 3,658 | | | | 5,991 | | | | 8,137 | | | | 12,867 | |
Shareholders’ deficit | | $ | (24,847 | ) | | $ | (12,896 | ) | | $ | (930 | ) | | $ | (1,305 | ) | | $ | (1,835 | ) |
| (1) | Received from Interstate Motor Club, Inc., an affiliated entity. |
| (2) | Received from Cash Check Inc. of Ga., an affiliated entity. |
| (3) | The ratio of earnings to fixed charges represents the number of times fixed charges are covered by earnings. For purposes of this ratio, “earnings” is determined by adding pre-tax income to “fixed charges,” which consists of interest on all indebtedness and an interest factor attributable to rent expense. |
| (4) | Calculation results in a deficiency in the ratio (i.e., less than one-to-one coverage). The deficiency in earnings to cover fixed charges was $12,388,726 for the year ended September 25, 2009 and $11,438,560 for the year ended September 25, 2008. |
| (5) | Net of unearned insurance commissions, unearned finance charges and unearned discounts. |
| (6) | Issued, in part, by our subsidiary, The Money Tree of Georgia Inc. See Note 7 to our consolidated audited financial statements for the year ended September 25, 2009. |
22
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the information under “Selected Consolidated Financial Data” and our audited consolidated financial statements and related notes and other financial data included elsewhere in this prospectus.
Overview
We make consumer finance loans and provide other financial products and services through our branch offices in Georgia, Alabama, Louisiana and Florida. We sell retail merchandise, principally furniture, appliances and electronics, at certain of our branch office locations and operate three used automobile dealerships in the State of Georgia. We also offer insurance products, prepaid phone services and automobile club memberships to our loan customers.
We fund our consumer loan demand through a combination of cash collections from our consumer loans, proceeds raised from the sale of debentures and demand notes and loans from various banks and other financial institutions. Our consumer loan business consists of making, purchasing and servicing direct consumer loans, consumer sales finance contracts and motor vehicle installment sales contracts. Direct consumer loans generally serve individuals with limited access to other sources of consumer credit, such as banks, savings and loans, other consumer finance businesses and credit cards. Direct consumer loans are general loans made typically to people who need money for some unusual or unforeseen expense, for the purpose of paying off an accumulation of small debts or for the purchase of furniture and appliances. Please see “Business” for a more detailed discussion of the various types of loans we make to our customers. The following table sets forth certain information about the components of our finance receivables:
Description of Loans and Contracts
| | | | | | | | | | | | |
| | | As of, or for, the Year Ended September 25, | |
| | | 2009 | | | 2008 | | | 2007 | |
Direct Consumer Loans: | |
Number of Loans Made to New Borrowers | | | 33,045 | | | | 27,770 | | | | 20,838 | |
Number of Loans Made to Former Borrowers | | | 64,774 | | | | 57,862 | | | | 55,117 | |
Number of Loans Made to Existing Borrowers | | | 50,504 | | | | 85,329 | | | | 110,364 | |
Total Number of Loans Made | | | 148,323 | | | | 170,961 | | | | 186,319 | |
Total Volume of Loans Made | | $ | 48,940,971 | | | $ | 66,766,194 | | | $ | 73,350,400 | |
Average Size of Loans Made | | $ | 330 | | | $ | 391 | | | $ | 394 | |
Number of Loans Outstanding | | | 52,684 | | | | 66,862 | | | | 76,284 | |
Total of Loans Outstanding* | | $ | 22,257,244 | | | $ | 34,859,944 | | | $ | 40,719,291 | |
Percent of Loans Outstanding | | | 32.9 | % | | | 42.3 | % | | | 46.6 | % |
Average Balance on Outstanding Loans | | $ | 422 | | | $ | 521 | | | $ | 534 | |
23
Description of Loans and Contracts
| | | | | | | | | | | | |
| | | As of, or for, the Year Ended September 25, | |
| | | 2009 | | | 2008 | | | 2007 | |
Motor Vehicle Installment Sales Contracts: | | | | | | | | | | | | |
Total Number of Contracts Made | | | 775 | | | | 763 | | | | 977 | |
Total Volume of Contracts Made | | $ | 14,097,733 | | | $ | 14,217,234 | | | $ | 17,965,678 | |
Average Size of Contracts Made | | $ | 18,191 | | | $ | 18,633 | | | $ | 18,389 | |
Number of Contracts Outstanding | | | 2,742 | | | | 2,726 | | | | 2,798 | |
Total of Contracts Outstanding* | | $ | 30,151,923 | | | $ | 30,707,329 | | | $ | 32,259,968 | |
Percent of Total Loans and Contracts | | | 44.6 | % | | | 37.3 | % | | | 36.9 | % |
Average Balance on Outstanding Contracts | | $ | 10,996 | | | $ | 11,265 | | | $ | 11,530 | |
| | | |
Consumer Sales Finance Contracts: | | | | | | | | | | | | |
Number of Contracts Made to New Customers | | | 2,241 | | | | 865 | | | | 137 | |
Number of Loans Made to Former Customers | | | 68 | | | | 3,161 | | | | 2,684 | |
Number of Loans Made to Existing Customers | | | 3,112 | | | | 3,211 | | | | 3,120 | |
Total Contracts Made | | | 5,421 | | | | 7,237 | | | | 5,941 | |
Total Volume of Contracts Made | | $ | 17,046,757 | | | $ | 18,883,178 | | | $ | 16,869,906 | |
Number of Contracts Outstanding | | | 6,596 | | | | 7,532 | | | | 7,067 | |
Total of Contracts Outstanding* | | $ | 15,176,373 | | | $ | 16,793,743 | | | $ | 14,466,682 | |
Percent of Total Loans and Contracts | | | 22.5 | % | | | 20.4 | % | | | 16.5 | % |
Average Balance of Outstanding Contracts | | $ | 2,301 | | | $ | 2,230 | | | $ | 2,047 | |
* Contracts outstanding are exclusive of the following aggregate amounts of bankrupt accounts: $6,762,101 for the year ended September 25, 2009; $6,794,358 for the year ended September 25, 2008; and $6,115,375 for the year ended September 25, 2007.
Below is a table showing our total gross outstanding finance receivables and bankrupt accounts:
| | | | | | | | | |
| | | September 25,
2009 | | September 25,
2008 | | September 25,
2007 |
Total Loans and Contracts Outstanding (gross): | | | | | | | | | |
| | | |
Direct Consumer Loans | | $ | 22,257,244 | | $ | 34,859,944 | | $ | 40,719,291 |
Motor Vehicle Installment | | | 30,151,923 | | | 30,707,329 | | | 32,259,968 |
Consumer Sales Finance | | | 15,176,373 | | | 16,793,743 | | | 14,466,682 |
Bankrupt Accounts | | | 6,762,101 | | | 6,794,358 | | | 6,115,375 |
| | | | | | | | | |
| | | |
Total Gross Outstanding | | $ | 74,347,641 | | $ | 89,155,374 | | $ | 93,561,316 |
| | | | | | | | | |
Below is a roll-forward of the balance of each category of our outstanding finance receivables. Loans originated reflect the gross amount of loans made or purchased during the period presented inclusive of pre-computed interest, fees and insurance premiums. Collections represent cash receipts in the form of repayments made on our loans as reflected in our Consolidated Statements of Cash Flows. Refinancings represent the amount of the pay off of loans refinanced. Charge-offs represent the gross amount of loans charged off as uncollectible (charge-offs are shown net of non-filing insurance receipts in our Allowance for Credit Losses). Rebates represent reductions to gross loan amounts of precomputed interest and insurance premiums resulting from loans refinanced and other loans paid off before maturity. See
24
“Summary of Significant Accounting Policies – Income Recognition” in Note 2 to our Consolidated Financial Statements for further discussion related to rebates of interest. Other adjustments primarily represent accounts transferred to and from the department that administers bankrupt accounts.
| | | | | | | | | | | | |
| | | Fiscal Year
Ended
September 25,
2009 | | | Fiscal Year
Ended
September 25,
2008 | | | Fiscal Year
Ended
September 25,
2007 | |
Direct Consumer Loans: | | | | | | | | | | | | |
Balance – beginning | | $ | 34,859,944 | | | $ | 40,719,291 | | | $ | 46,071,669 | |
Loans originated | | | 48,940,971 | | | | 66,766,194 | | | | 73,350,400 | |
Collections | | | (40,671,119 | ) | | | (47,076,723 | ) | | | (52,252,511 | ) |
Refinancings | | | (10,912,645 | ) | | | (14,791,503 | ) | | | (18,154,981 | ) |
Charge-offs, gross | | | (7,228,663 | ) | | | (7,357,665 | ) | | | (4,066,752 | ) |
Rebates/other adjustments | | | (2,731,244 | ) | | | (3,399,650 | ) | | | (4,228,534 | ) |
| | | | | | | | | | | | |
Balance – end | | $ | 22,257,244 | | | $ | 34,859,944 | | | $ | 40,719,291 | |
| | | | | | | | | | | | |
Consumer Sales Finance Contracts: | | | | | | | | | | | | |
Balance – beginning | | $ | 16,793,743 | | | $ | 14,466,682 | | | $ | 11,813,566 | |
Loans originated | | | 17,046,757 | | | | 18,883,178 | | | | 16,869,906 | |
Collections | | | (7,760,796 | ) | | | (7,267,346 | ) | | | (6,058,209 | ) |
Refinancings | | | (5,635,286 | ) | | | (5,460,970 | ) | | | (4,993,560 | ) |
Charge-offs, gross | | | (3,383,645 | ) | | | (1,862,589 | ) | | | (1,110,556 | ) |
Rebates/other adjustments | | | (1,884,400 | ) | | | (1,965,212 | ) | | | (2,054,465 | ) |
| | | | | | | | | | | | |
Balance – end | | $ | 15,176,373 | | | $ | 16,793,743 | | | $ | 14,466,682 | |
| | | | | | | | | | | | |
Motor Vehicle Installment Sales Contracts: | | | | | | | | | | | | |
Balance – beginning | | $ | 30,707,329 | | | $ | 32,259,968 | | | $ | 31,280,840 | |
Loans originated | | | 14,097,733 | | | | 14,217,234 | | | | 17,965,678 | |
Collections | | | (11,502,246 | ) | | | (13,286,462 | ) | | | (14,469,121 | ) |
Refinancings | | | - | | | | - | | | | - | |
Charge-offs, gross | | | (1,768,170 | ) | | | (1,370,165 | ) | | | (1,185,753 | ) |
Rebates/other adjustments | | | (1,382,723 | ) | | | (1,113,246 | ) | | | (1,331,676 | ) |
| | | | | | | | | | | | |
Balance – end | | $ | 30,151,923 | | | $ | 30,707,329 | | | $ | 32,259,968 | |
| | | | | | | | | | | | |
Total Active Accounts: | | | | | | | | | | | | |
Balance – beginning | | $ | 82,361,016 | | | $ | 87,445,941 | | | $ | 89,166,075 | |
Loans originated | | | 80,085,461 | | | | 99,866,606 | | | | 108,185,984 | |
Collections | | | (59,934,161 | ) | | | (67,630,531 | ) | | | (72,779,841 | ) |
Refinancings | | | (16,547,931 | ) | | | (20,252,473 | ) | | | (23,148,541 | ) |
Charge-offs, gross | | | (12,380,478 | ) | | | (10,590,419 | ) | | | (6,363,061 | ) |
Rebates/other adjustments | | | (5,998,367 | ) | | | (6,478,108 | ) | | | (7,614,675 | ) |
| | | | | | | | | | | | |
Balance – end | | $ | 67,585,540 | | | $ | 82,361,016 | | | $ | 87,445,941 | |
| | | | | | | | | | | | |
Total Bankrupt Accounts: | | | | | | | | | | | | |
Balance – beginning | | $ | 6,794,358 | | | $ | 6,115,375 | | | $ | 5,618,931 | |
Charge-offs, gross | | | (1,782,967 | ) | | | (778,169 | ) | | | (790,514 | ) |
Adjustments | | | 1,750,710 | | | | 1,457,152 | | | | 1,286,958 | |
Balance – end | | $ | 6,762,101 | | | $ | 6,794,358 | | | $ | 6,115,375 | |
| | | | | | | | | | | | |
Total Gross O/S Receivables | | $ | 74,347,641 | | | $ | 89,155,374 | | | $ | 93,561,316 | |
| | | | | | | | | | | | |
25
Below is a reconciliation of the amounts of the finance receivables originated and repaid (collections) from the receivable roll-forward to the amounts shown in our Consolidated Statements of Cash Flows.
| | | | | | | | | | | | |
| | | Fiscal Year
Ended
September 25,
2009 | | | Fiscal Year
Ended
September 25,
2008 | | | Fiscal Year
Ended
September 25,
2007 | |
Finance Receivables Originated: | | | | | | | | | | | | |
Direct consumer loans | | $ | 48,940,971 | | | $ | 66,766,194 | | | $ | 73,350,400 | |
Consumer sales finance | | | 17,046,757 | | | | 18,883,178 | | | | 16,869,906 | |
Motor vehicle installment sales | | | 14,097,733 | | | | 14,217,234 | | | | 17,965,678 | |
| | | | | | | | | | | | |
Total gross loans originated | | | 80,085,461 | | | | 99,866,606 | | | | 108,185,984 | |
Non-cash items included in gross finance receivables* | | | (21,745,038 | ) | | | (26,531,233 | ) | | | (31,243,362 | ) |
| | | | | | | | | | | | |
Finance receivables originated – cash flows** | | $ | 58,340,423 | | | $ | 73,335,373 | | | $ | 76,942,622 | |
| | | | | | | | | | | | |
Loans Repaid: | | | | | | | | | | | | |
Collections | | | | | | | | | | | | |
Direct consumer loans | | $ | 40,671,119 | | | $ | 47,076,723 | | | $ | 52,252,512 | |
Consumer sales finance | | | 7,760,796 | | | | 7,267,346 | | | | 6,058,208 | |
Motor vehicle installment sales | | | 11,502,246 | | | | 13,286,462 | | | | 14,469,121 | |
| | | | | | | | | | | | |
Finance receivables repaid – cash flows | | $ | 59,934,161 | | | $ | 67,630,531 | | | $ | 72,779,841 | |
| | | | | | | | | | | | |
* Includes precomputed interest and fees (since these amounts are included in the gross amount of finance receivables originated but are not advanced in the form of cash to customers) and refinanced receivable balances (since there is no cash generated from the repayment of original receivables refinanced).
** Includes amounts advanced to customers in conjunction with refinancings, which were $4,738,460 for the fiscal year ended September 25, 2009; $10,545,399 for the fiscal year ended September 25, 2008; and $10,545,399 for the fiscal year ended September 25, 2007.
Segments and Seasonality
We segment our business operations into the following two segments:
| | • | | consumer finance and sales; and |
| | • | | automotive finance and sales. |
The consumer finance and sales segment is comprised primarily of small consumer loans and sales of consumer goods such as furniture, appliances and electronics. We typically experience our strongest financial performance for the consumer finance and sales segment during the holiday season, which is our first fiscal quarter ending December 25.
The automotive finance and sales segment is comprised exclusively of used vehicle sales and their related financing. We typically experience our strongest financial performance for the automotive finance and sales segment during our second fiscal quarter ending March 25 when used car sales are the highest. Please refer to Note 16 in the “Notes to Consolidated Financial Statements” for a breakdown of our operations by segment.
26
Net Interest Margin
A principal component of our profitability is our net interest margin, which is the difference between the interest that we earn on finance receivables and the interest that we pay on borrowed funds. In some states, statutes regulate the interest rates that we may charge our customers, while, in other locations, competitive market conditions establish interest rates that we may charge. Differences also exist in the interest rates that we earn on the various components of our finance receivable portfolio.
Unlike our interest income, our interest expense is sensitive to general market interest rate fluctuations. These general market fluctuations directly impact our cost of funds. Our generally limited ability to increase the interest rates earned on new and existing finance receivables restricts our ability to react to increases in our cost of funds. Accordingly, increases in market interest rates generally will narrow our interest rate spread and lower our profitability, while decreases in market interest rates generally will widen our interest rate spread and increase our profitability. Significant increases in market interest rates will likely result in a reduction in our liquidity and profitability and impair our ability to pay interest and principal on the debentures. See “Quantitative and Qualitative Disclosures About Market Risk.”
The decrease in the net interest margin for the fiscal year ended September 25, 2009 was a result primarily of the suppressed average rate earned on outstanding finance receivables. Our liquidity issues have caused us to tighten our lending guidelines and significantly decrease our direct consumer loans, while we experienced only slight decreases in consumer sales finance contracts and motor vehicle installment contracts. These contracts generally yield a lower interest rate as compared to direct consumer loans. We also saw a slight increase in the average interest paid on our debt as a result of higher rates paid on short-term borrowings during fiscal year 2009.
The following table presents important data relating to our net interest margin:
| | | | | | | | | | | | |
| | | As of, or for, the Year Ended September 25, | |
| | | 2009 | | | 2008 | | | 2007 | |
Average net finance receivables (1) | | $ | 70,353,355 | | | $ | 79,929,788 | | | $ | 79,247,445 | |
Average notes payable(2) | | $ | 78,753,900 | | | $ | 87,985,623 | | | $ | 87,680,692 | |
| | | |
Interest income | | $ | 11,506,002 | | | $ | 14,211,519 | | | $ | 14,742,029 | |
Loan fee income | | | 4,083,072 | | | | 5,068,550 | | | | 4,738,711 | |
| | | | | | | | | | | | |
Total interest and fee income | | | 15,589,074 | | | | 19,280,069 | | | | 19,480,740 | |
Interest expense | | | 7,611,185 | | | | 8,275,310 | | | | 8,025,969 | |
| | | | | | | | | | | | |
| | | |
Net interest and fee income before provision for credit losses | | $ | 7,977,889 | | | $ | 11,004,759 | | | $ | 11,454,771 | |
Average interest rate earned | | | 22.5 | % | | | 24.1 | % | | | 24.6 | % |
Average interest rate paid | | | 9.7 | % | | | 9.4 | % | | | 9.2 | % |
Net interest rate spread | | | 12.8 | % | | | 14.7 | % | | | 15.4 | % |
Net interest margin(3) | | | 11.6 | % | | | 13.8 | % | | | 14.5 | % |
| (1) | Averages are computed using month-end balances of finance receivables (net of unearned interest/fees, insurance commissions, and unearned discounts) during the year presented.Net finance receivables for this purpose include all outstanding finance receivables, including accounts in bankruptcy and non-accrual status. |
| (2) | Averages are computed using month-end balances of interest bearing debt (including senior debt, senior subordinated debt, subordinated debt to related parties, debentures and demand notes) during the year presented. |
| (3) | Net interest margin represents net interest and fee income (net of the provision for credit losses) divided by average net finance receivables. |
27
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on our net interest income. Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate), (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) changes in rate/volume (change in rate multiplied by change in volume).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Increase (Decrease) Due to | | | | | | | |
| | | Volume | | | Rate | | | Rate/Volume | | | Total net increase (decrease) | |
| | | 9/25/09 | | | 9/25/08 | | | 9/25/09 | | | 9/25/08 | | | 9/25/09 | | | 9/25/08 | | | 9/25/09 | | | 9/25/08 | |
Earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest income on finance receivables: | | $ | (2,517,649 | ) | | $ | (136,473 | ) | | $ | (1,005,772 | ) | | $ | (55,899 | ) | | $ | (167,574 | ) | | $ | (8,299 | ) | | $ | (3,690,995 | ) | | $ | (200,671 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Debentures & demand notes | | | (874,693 | ) | | | 19,996 | | | | 131,167 | | | | 303,295 | | | | (15,990 | ) | | | 746 | | | | (759,516 | ) | | | 324,037 | |
Other debt | | | 3,582 | | | | (47,906 | ) | | | 93,744 | | | | (16,611 | ) | | | (1,935 | ) | | | (10,179 | ) | | | 95,391 | | | | (74,696 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total interest expense | | | (871,111 | ) | | | (27,910 | ) | | | 224,911 | | | | 286,684 | | | | (17,925 | ) | | | (9,433 | ) | | | (664,125 | ) | | | 249,341 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest income | | $ | (1,646,538 | ) | | $ | (108,563 | ) | | $ | (1,230,683 | ) | | $ | (342,583 | ) | | $ | (149,649 | ) | | $ | 1,134 | | | $ | (3,026,870 | ) | | $ | (450,012 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Return on Deficit and Assets
Below is a table showing certain performance ratios for the fiscal years ended September 25, 2009 and 2008. These ratios are typically reported by financial institutions in connection with their annual financial performance.
| | | | | | |
Performance Ratios(1) | | 2009 | | | 2008 | |
Return on average assets(2) | | -16.4 | % | | -10.9 | % |
Return on average shareholders’ deficit(3) | | -61.9 | % | | -181.6 | % |
Average deficit to average assets ratio(4) | | -26.5 | % | | -6.0 | % |
| (1) | Averages are computed using quarter end balances. |
| (2) | Calculated as net income divided by average total assets during the fiscal year. |
| (3) | Calculated as net income divided by average shareholders’ deficit during the fiscal year. |
| (4) | Calculated as average shareholders’ deficit divided by average total assets during the fiscal year. |
Analysis of Allowance for Credit Losses
An allowance for credit losses is maintained primarily to account for the probable losses inherent in the finance receivables portfolio. The allowance is calculated based upon management’s estimate of the expected collectibility of loans outstanding based upon a variety of factors, including, without limitation, periodic analysis of the loan portfolio, historic loan loss experience, borrowers’ ability to repay and collateral considerations. We maintain an allowance for credit losses at a level that we consider adequate to provide for probable losses based on historical ratios of charge-offs to average notes receivable.
The following table shows these ratios of charge-offs to average notes receivable for the categories of our finance receivables. The average net finance receivables are computed using monthly balances, net of unearned interest, unearned insurance commissions and unearned discounts. Charge-offs are shown at gross amounts as presented in the receivable roll-forward above. Recoveries represent receipts from non-filing insurance claims and cash recoveries.
28
| | | | | | | | | | | | |
| | | As of, or for, the Fiscal Year Ended September 25, | |
| | | 2009 | | | 2008 | | | 2007 | |
Direct Consumer Loans and Consumer Sales Finance Contracts: | | | | | | | | | | | | |
| | | |
Average net finance receivables | | $ | 45,172,898 | | | $ | 54,074,302 | | | $ | 53,453,781 | |
| | | |
Charge-offs – direct consumer | | $ | 7,228,663 | | | $ | 7,357,665 | | | $ | 4,066,752 | |
Charge-offs – consumer sales finance | | $ | 3,383,645 | | | $ | 1,862,589 | | | $ | 1,110,556 | |
Charge-offs – bankruptcy | | $ | 1,782,967 | | | $ | 778,169 | | | $ | 790,514 | |
| | | | | | | | | | | | |
Total gross charge-offs | | $ | 12,395,275 | | | $ | 9,998,423 | | | $ | 5,967,822 | |
Recoveries (all direct consumer) | | $ | (3,027,086 | ) | | $ | (2,739,668 | ) | | $ | (2,751,142 | ) |
| | | | | | | | | | | | |
Charge-offs, net | | $ | 9,368,189 | | | $ | 7,258,755 | | | $ | 3,216,680 | |
Percent of net charge-offs to average receivables | | | 20.7 | % | | | 13.4 | % | | | 6.0 | % |
| | | |
Motor Vehicle Installment Sales Contracts: | | | | | | | | | | | | |
| | | |
Average net finance receivables | | $ | 25,180,457 | | | $ | 25,855,486 | | | $ | 25,793,664 | |
| | | |
Charge-offs, gross | | $ | 1,768,170 | | | $ | 1,370,165 | | | $ | 1,185,753 | |
Recoveries | | | - | | | | - | | | | - | |
| | | | | | | | | | | | |
Charge-offs, net | | $ | 1,768,170 | | | $ | 1,370,165 | | | $ | 1,185,753 | |
Percent of net charge-offs to average receivables | | | 7.0 | % | | | 5.3 | % | | | 4.6 | % |
| | | |
Total Receivables: | | | | | | | | | | | | |
| | | |
Average net finance receivables | | $ | 70,353,355 | | | $ | 79,929,788 | | | $ | 79,247,445 | |
| | | |
Charge-offs, gross | | $ | 14,163,445 | | | $ | 11,368,588 | | | $ | 7,153,575 | |
Recoveries (all direct consumer) | | $ | (3,027,086 | ) | | $ | (2,739,668 | ) | | $ | (2,751,142 | ) |
| | | | | | | | | | | | |
Charge-offs, net | | $ | 11,136,359 | | | $ | 8,628,920 | | | $ | 4,402,433 | |
Percent of net charge-offs to average receivables | | | 15.8 | % | | | 10.8 | % | | | 5.6 | % |
During fiscal year 2009, we continued to experience a high level of net charge-offs in both the consumer and automotive segments. Increases in unemployment and the recessionary economy continued to negatively impact our customer base. Net charge-offs in the consumer segment increased approximately $2.1 million over 2008 and the automotive segment saw increases of $0.4 million. See “Risk Factors – Risks Related to Our Business – We suffered significant credit losses in 2008 and 2009 due to continued weakening economic conditions, and there is no guarantee such credit losses will not continue during this downturn in the economy or that our operations and profitability will not continue to be negatively affected.”
During fiscal year 2008, gross charge-offs of finance receivables in the consumer segment increased dramatically over 2007. During the fourth quarter of 2008, in conjunction with their initial Sarbanes-Oxley testing of controls over the charge-off process and the completion of its implementation of a new accounting system for loans, management performed an extensive analysis to determine the amount of past due loans over 180 days delinquent which had not been charged off. The purpose of the analysis was to determine branch level controls over the determination of collectibility of past due loans. Although delinquent loans were being actively monitored and collection efforts were taking place, which included active and ongoing legal processes, management determined that there was not sufficient evidence to support the deferral of probable losses inherent in these loans, especially given the change in the economy and current liquidity crisis. This resulted in an increase of approximately $4.0 million in consumer segment charge-offs and an increase of approximately $0.2 million in automotive segment charge-offs compared to fiscal year 2007.
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As of September 25, 2009 and 2008, our allowance for credit losses was $7.4 million and $8.9 million, respectively. Based on both the significantly higher levels of 2009 and 2008 charge-offs and the continued extreme adverse economic conditions, management revised its methodology in determining the adequacy of its allowance to rely much more heavily on current data available rather than simply looking at average charge-offs over the most recent three years. In 2008, the revision in methodology in evaluating the sufficiency of the allowance resulted in an increase to the allowance and an additional provision of approximately $4.6 million. In 2009, the allowance decreased due to the decrease in net finance receivables over the course of fiscal year 2009. Our liquidity issues have caused us to significantly curtail our historical level of lending and thus caused us to tighten our lending guidelines. This has resulted in a lower delinquency amount and factored into the determination of the allowance. The allowance for credit losses has remained relatively constant at 11.7% and 11.6% of the net outstanding finance receivables at September 25, 2009 and 2008, respectively.
Delinquency Information
Our delinquency levels reflect, among other factors, changes in the mix of loans in the portfolio, the quality of receivables, the success of collection efforts, bankruptcy trends and general economic conditions. The delinquency information in the following tables is computed on the basis of the amount past due in accordance with the original payment terms of the loan (contractual method). We use the contractual method for all external reporting purposes. Management closely monitors delinquency using this method to measure the quality of our loan portfolio and the probability of credit loss. We also use other tools, such as a recency report, which shows the date of the last full contractual payment received on the loan, to determine a particular customer’s willingness to pay. For example, if a delinquent customer has made a recent payment, we may decide to delay more serious collection measures, such as repossession of collateral. However, such a payment will not change the non-accrual status of the account until all of the principal and interest amounts contractually due are brought current (we receive one or more full contractual payments and the account is less than 60 days contractually delinquent), at which time we believe future payments are reasonably assured.
Our gross finance receivables on non-accrual status, including bankruptcy accounts, totaled approximately $14.6 million and approximately $17.8 million for the fiscal years ended September 25, 2009 and 2008, respectively. Suspended interest as a result of these non-accrual accounts totaled $0.9 million, $1.2 million and $1.1 million for the fiscal years ended September 25, 2009, 2008 and 2007, respectively. Generally, we do not refinance delinquent accounts. However, on occasion a past due account will qualify for refinancing. We use the following criteria for determining whether a delinquent account qualifies for refinancing: (1) a re-evaluation of the customer’s creditworthiness is performed to ensure additional credit is warranted; and (2) a payment must have been received on the account within the last 10 days. Since we refinance delinquent loans on such an infrequent basis, we do not maintain any statistics relating to this type of refinancing. Below is certain information relating to the delinquency status of each category of our receivables for the years ended September 25, 2009 and 2008.
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| | | | | | | | | | | | | | | | | | | | |
| | | As of September 25, 2009 | |
| | | Direct
Consumer
Sales | | | Consumer Sales
Finance
Contracts | | | Motor Vehicle
Installment
Sales
Contracts | | | Bankrupt
Accounts | | | Total | |
Gross Loans and Contracts Receivable | | $ | 22,257,244 | | | $ | 15,176,373 | | | $ | 30,151,923 | | | $ | 6,762,101 | | | $ | 74,347,641 | |
Loans and Contracts 60-90 days past due | | $ | 682,094 | | | $ | 377,524 | | | $ | 424,429 | | | $ | 272,538 | | | $ | 1,756,585 | |
Percentage of Outstanding | | | 3.06 | % | | | 2.49 | % | | | 1.41 | % | | | 4.03 | % | | | 2.36 | % |
Loans and Contracts greater than 90 days past due | | $ | 4,774,562 | | | $ | 2,153,578 | | | $ | 787,638 | | | $ | 4,221,045 | | | $ | 11,936,823 | |
Percentage of Outstanding | | | 21.45 | % | | | 14.19 | % | | | 2.61 | % | | | 62.42 | % | | | 16.06 | % |
Loans and Contracts greater than 60 days past due | | $ | 5,456,656 | | | $ | 2,531,102 | | | $ | 1,212,067 | | | $ | 4,493,583 | | | $ | 13,693,408 | |
Percentage of Outstanding | | | 24.52 | % | | | 16.68 | % | | | 4.02 | % | | | 66.45 | % | | | 18.42 | % |
| | | | | | | | | | | | | | | | | | | | |
| | | As of September 25, 2008 | |
| | | Direct
Consumer
Sales | | | Consumer Sales
Finance
Contracts | | | Motor Vehicle
Installment
Sales
Contracts | | | Bankrupt
Accounts | | | Total | |
Gross Loans and Contracts Receivable | | $ | 34,859,944 | | | $ | 16,793,743 | | | $ | 30,707,329 | | | $ | 6,794,358 | | | $ | 89,155,374 | |
Loans and Contracts 60-90 days past due | | $ | 665,191 | | | $ | 300,922 | | | $ | 338,953 | | | $ | 242,639 | | | $ | 1,547,705 | |
Percentage of Outstanding | | | 1.91 | % | | | 1.79 | % | | | 1.10 | % | | | 3.57 | % | | | 1.74 | % |
Loans and Contracts greater than 90 days past due | | $ | 7,486,842 | | | $ | 3,212,367 | | | $ | 285,407 | | | $ | 4,093,590 | | | $ | 15,078,206 | |
Percentage of Outstanding | | | 21.48 | % | | | 19.13 | % | | | 0.93 | % | | | 60.25 | % | | | 16.91 | % |
Loans and Contracts greater than 60 days past due | | $ | 8,152,033 | | | $ | 3,513,289 | | | $ | 624,360 | | | $ | 4,336,229 | | | $ | 16,625,911 | |
Percentage of Outstanding | | | 23.39 | % | | | 20.92 | % | | | 2.03 | % | | | 63.82 | % | | | 18.65 | % |
Results of Operations
Comparison of Fiscal Years Ended September 25, 2009 and 2008
Net Revenues
Net revenues were $16.0 million and $17.0 million for the fiscal years ended September 25, 2009 and 2008, respectively. The $1.0 million decrease in net revenues was primarily a result of the significant decrease in interest and fee income as well as other components of loan-related income. These decreases in income were partially offset by significant decreases in the provision for credit losses.
Net Interest and Fee Income Before Provision for Credit Losses
Net interest and fee income before provision for credit losses was $8.0 million and $11.0 million for the fiscal years ended September 25, 2009 and 2008, respectively. Total interest and fee income decreased $3.7 million. Liquidity issues caused us to curtail historical lending levels resulting in a 20% decrease in finance receivables originated in 2009 compared to 2008. Interest expense decreased $0.7 million from $8.3 million in 2008 to $7.6 million in 2009 due to a decrease in outstanding debt of $9.5 million during fiscal year 2009.
Provision for Credit Losses
Provision for credit losses was $9.6 million and $13.8 million for the fiscal years ended September 25, 2009 and 2008, respectively. Charge-offs, net of recoveries, increased by $2.5 million, from $8.6 million to $11.1 million, in fiscal year 2009 over 2008. Charge-offs
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expressed as a percentage of average net finance receivables increased to 15.8% in fiscal year 2009, compared to 10.8% in fiscal year 2008. However, we experienced a significant decrease in the dollar amount of net finance receivables outstanding, which is the basis for determining the allowance for credit losses. This and other factors led us to establish the allowance for credit losses at a level that resulted in a decrease at September 25, 2009 as compared to September 25, 2008, with a corresponding decrease in the provision for credit losses. See “Risk Factors – Risks Related to Our Business – We suffered significant credit losses in 2008 and 2009 due to continued weakening economic conditions, and there is no guarantee such credit losses will not continue during this downturn in the economy or that our operations and profitability will not continue to be negatively affected.”
Insurance and Other Products
Income from commissions on insurance products and motor club memberships decreased from $11.5 million in fiscal year 2008 to $10.0 million in fiscal year 2009. Of the total for fiscal year 2009, commissions on credit insurance products were $5.7 million and non-credit insurance products and motor club memberships were $4.3 million. Approximately 67.3% of our loans during this period included one or more of our insurance products or motor club memberships. Delinquency fees and other income were in aggregate $2.1 million and $2.4 million for fiscal years ended September 25, 2009 and 2008, respectively. This decrease is consistent with the decrease in all loan-related income components.
Gross Margin on Retail Sales
Gross margin on retail sales were $5.7 million and $6.0 million for the fiscal years ended September 25, 2009 and 2008, respectively. Sales and gross margins in the consumer segment were $6.6 million and $2.9 million, respectively for fiscal year 2009 and $7.4 million and $3.3 million, respectively, for fiscal year 2008. In the automotive segment, sales were $9.1 million, down $0.4 million from 2008 sales of $9.5 million. Gross margins remained the same as 2008 gross margins of $2.4 million. We were encouraged by the small decreases in overall sales during fiscal year 2009 in light of the poor general economic conditions. We view this as a positive indicator for retail sales entering fiscal year 2010.
Operating Expenses/Impairment loss from write-down of goodwill
Operating expenses were $28.4 million and $28.5 million for the fiscal years ended September 25, 2009 and 2008, respectively. Although our lending activities and resulting income in the fiscal year ended September 25, 2009 decreased significantly, many components of operating expenses do not vary with income levels. Personnel expenses increased $0.2 million in 2009 over 2008 due to increases in health insurance costs. Facilities expense increased $0.2 million due to higher utility expenses and scheduled increases in facility leases. General and administrative expenses decreased by $0.2 million based on lower communication and supplies expenses. Other operating expenses decreased $0.3 million due to an impairment charge to goodwill of $1.0 million in fiscal year 2008, which was offset by $0.5 million in legal costs associated with the settlement of a lawsuit and increases in other professional expenses in 2009. We also recorded a loss of $0.1 million on the sale of finance receivables in 2009.
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Income Tax Expense (Benefit)
Income tax benefit was $0.4 million and income tax expense was $0.5 million for the fiscal years ended September 25, 2009 and 2008, respectively. For the fiscal year ended September 25, 2009, we increased the valuation allowance for our deferred income tax asset by $4.2 million compared to $4.8 million for the fiscal year ended September 25, 2008, resulting in a difference between income taxes calculated using expected annual federal and state rates and actual income tax expense.
Comparison of Fiscal Years Ended September 25, 2008 and 2007
Net Revenues
Net revenues were $17.0 million and $27.9 million for the fiscal years ended September 25, 2008 and 2007, respectively. The decrease in net revenues was primarily as a result of the significant increase in provision for credit losses. Decreases in insurance commissions, interest and fee income and gross margin on retail sales also contributed to the $10.9 million overall decrease.
Net Interest and Fee Income Before Provision for Credit Losses
Net interest and fee income before provision for credit losses was $11.0 million and $11.5 million for the fiscal years ended September 25, 2008 and 2007, respectively. Total interest and fee income decreased $0.2 million while interest expense increased $0.3 million, from $8.0 million in 2007 to $8.3 million in 2008.
Provision for Credit Losses
Provision for credit losses was $13.8 million and $5.0 million for the fiscal years ended September 25, 2008 and 2007, respectively. Charge-offs net of recoveries increased by $4.2 million in fiscal year 2008 over 2007. During the fourth quarter of 2008, in conjunction with their initial Sarbanes-Oxley testing of controls over the charge-off process and the completion of its implementation of a new accounting system for loans, management performed an extensive analysis to determine the amount of past due loans over 180 days delinquent which had not been charged off. The purpose of the analysis was to determine branch level controls over the determination of collectibility of past due loans. Although delinquent loans were being actively monitored and collection efforts were taking place, which included active and ongoing legal processes, management determined that there was not sufficient evidence to support the deferral of probable losses inherent in these loans, especially given the change in the economy and current liquidity crisis. Accordingly, management expanded its analysis and scrutiny of delinquent loans, which resulted in an abnormal amount of charge-offs in fiscal year 2008. Based on both the abnormal 2008 charge-offs and the extreme adverse economic data published in the fourth quarter of fiscal year 2008, management revised its methodology in determining the adequacy of its allowance and now relies much more heavily on current data available rather than simply looking at average charge-offs over the most recent three years. The revision in methodology in evaluating the sufficiency of the allowance resulted in an increase to the allowance and an additional provision for credit losses of approximately $4.6 million in fiscal year 2009.
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Insurance and Other Products
Income from commissions on insurance products and motor club memberships decreased from $12.1 million in 2007 to $11.5 million in fiscal year 2008. During fiscal year 2008, commissions on credit insurance products were $6.6 million and non-credit insurance products and motor club memberships were $4.9 million. Approximately 65.8% of our loans during this period included one or more of our insurance products or motor club memberships. Delinquency fees and other income were in aggregate $2.3 million and $2.5 million for the fiscal years ended September 25, 2008 and 2007, respectively. This decrease was partially due to the decreases in delinquency fees as well as other miscellaneous charges and products included in other income.
Gross Margin on Retail Sales
Gross margin on retail sales were $6.0 million and $6.8 million for the fiscal years ended September 25, 2008 and 2007, respectively. Sales and gross margins in the consumer segment in fiscal year 2008 were $7.4 million and $3.3 million, respectively, an increase of $0.8 million and $0.3 million over fiscal year 2007. In the automotive segment, sales were $9.5 million, down $2.6 million from fiscal year 2007, and gross margins decreased $1.1 million from $3.8 million to $2.7 million. The decline in vehicle sales is consistent with the auto industry’s overall decrease in sales due to the poor general economic conditions and decline in consumer spending.
Operating Expenses
Operating expenses were $28.5 million and $27.6 million for the fiscal years ended September 25, 2008 and 2007, respectively. Personnel expenses increased $0.2 million in 2008 over 2007 due to increases in bonuses and other incentives. Other operating expenses increased $0.5 million or 9%. Although we have continued to refine our process for customer solicitation that resulted in savings in postage and other costs, we recorded an impairment charge to goodwill of $1.0 million in fiscal year 2008. We also curtailed the advertising for our securities offerings. Travel and related cost were also down from prior year levels due to a decreased number of personnel required to travel. General and administrative expenses increased approximately $0.1 million or 4% as a result of the cost associated with the implementation of a new computer system for our branch operations.
Income Tax Expense (Benefit)
Income tax expense was $0.5 million and income tax benefit was $0.1 million for the fiscal years ended September 25, 2008 and 2007, respectively. For the fiscal year ended September 25, 2008, we increased the valuation allowance for our deferred income tax asset by $4.8 million, resulting in a difference between income taxes calculated using expected annual federal and state rates and actual income tax expense.
Liquidity and Capital Resources
Cash and cash equivalents decreased by approximately $9.6 million during fiscal year 2009 from a balance of $12.5 million at September 25, 2008 to $2.9 million at September 25, 2009, as compared to a decrease of approximately $5.3 million during fiscal year 2008 from a balance of $17.9 million at September 25, 2007 to $12.5 million at September 25, 2008. During 2009, we redeemed an unusually high amount of debentures ($18.6 million) while the proceeds from the sale of debentures were $10.0 million. The primary source of cash was repayments from customers on finance receivables ($59.9 million) while cash used for origination of finance receivables was $58.3 million. Other uses of cash were purchases of property and equipment ($0.7 million), redemption of demand notes ($0.5 million) and repayments on senior debt ($0.4 million).
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Below is a table showing the net effect of our cash flows from financing activities for our fiscal years ended September 25, 2009 and 2008:
| | | | | | | | |
| | | 2009 | | | 2008 | |
Senior debt – borrowing | | $ | 3,959,931 | | | $ | 2,805,819 | |
Senior debt – repayments | | | (4,328,304 | ) | | | (2,622,592 | ) |
| | | | | | | | |
Net | | $ | (368,373 | ) | | $ | 183,227 | |
Demand notes – borrowing | | $ | 3,002,554 | | | $ | 3,151,573 | |
Demand notes – repayments | | | (3,514,007 | ) | | | (5,484,787 | ) |
| | | | | | | | |
Net | | $ | (511,453 | ) | | $ | (2,333,214 | ) |
Debentures – borrowing | | $ | 10,028,146 | | | $ | 15,435,214 | |
Debentures – repayments | | | (18,634,536 | ) | | | (15,087,019 | ) |
| | | | | | | | |
Net | | $ | (8,606,390 | ) | | $ | 348,195 | |
Cash payments for interest for the fiscal years ended September 25, 2009 and 2008 were as follows:
| | | | | | |
| | | 2009 | | 2008 |
Senior debt | | $ | 176,312 | | $ | 78,174 |
Debentures and demand notes | | | 8,826,819 | | | 7,671,351 |
| | | | | | |
Total interest payments | | $ | 9,003,131 | | $ | 7,749,525 |
| | | | | | |
Debentures and Demand Notes
Historically, we or our subsidiary, The Money Tree of Georgia Inc., have offered debentures and demand notes to investors as a significant source of our required capital. We rely on the sale of debentures and demand notes to fund redemption obligations, make interest payments and to fund other company working capital.
We commenced our public offerings of $35 million in Demand Notes and $75 million in Debentures on April 10, 2009. As of December 25, 2009, we had raised $3,518,368 in gross offering proceeds from the sale of Demand Notes and $12,042,820 in gross offering proceeds from the sale of Debentures in these public offerings.
During the fiscal year ended September 25, 2009, we (1) received gross proceeds of $10.0 million from the sale of debentures and $3.0 million from the sale of demand notes, and (2) paid $18.6 million for redemption of debentures and $3.5 million for redemption of demand notes. As of September 25, 2009, we and our subsidiary, The Money Tree of Georgia Inc., had $73.6 million of debentures and $3.1 million of demand notes outstanding, compared to $82.2 million of debentures and $3.6 million of demand notes outstanding as of September 25, 2008. Accrued interest payable on debentures and demand notes was $13.5 million and $14.9 million as of September 25, 2009 and 2008, respectively. This decrease is a result of the unusually high amount of debentures redeemed during fiscal year 2009. See “Risk Factors – Risks Related to Our Offering – If we are unable to repay or redeem the principal amount of debentures or demand notes when due, and we are unable to obtain additional financing or other sources of capital, we may be forced to sell off our loan receivables and other operating assets or we might be forced to cease our operations, and you could lose some or all of your investment.”
Debentures may be redeemed at our investors’ option at the end of the interest adjustment period selected by them (one year, two years or four years) or at maturity. Demand notes may be redeemed by holders at any time.
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Our obligations with respect to the debentures and demand notes are governed by the terms of indenture agreements with U.S. Bank National Association, as trustee. Under the indentures, in addition to other possible events of default, if we fail to make a payment of principal or interest under any debenture or demand note and this failure is not cured within 30 days, we will be deemed in default. Upon such a default, the trustee or holders of 25% in principal of the outstanding debentures or demand notes could declare all principal and accrued interest immediately due and payable. Since our total assets do not cover these debt payment obligations, we would most likely be unable to make all payments under the debentures or demand notes when due, and we might be forced to cease our operations.
Lack of a Significant Line of Credit
Although we have been without a significant line of credit for the past several years, we are evaluating the possibility of obtaining a line of credit or other forms of capital to meet our future liquidity needs. In fiscal year 2009, loans repaid were approximately $60.0 million. This represents approximately 81% of our average gross outstanding finance receivables during the period. The average term of our direct consumer loans is less than seven months; therefore, if we anticipate having short-term cash flow problems over the next 12 months, we could curtail the amount of funds we loan to our customers and focus on collections to increase cash flow, while continuing to explore other financing options if any are available. During the fiscal year ended September 25, 2009, we used $9.1 million of our operating cash flow from collections to fund net redemptions of debentures and demand notes.
We are evaluating the possibility of obtaining a line of credit for our long-term financing needs. If we fail to secure a line of credit, we will continue to be heavily reliant upon the sale of debentures and demand notes for our liquidity. If we are unable to sell sufficient debentures and demand notes for any reason and we fail to obtain a line of credit or other source of financing, our ability to meet our obligations, including our redemption obligations with respect to the debentures and demand notes, could be materially and adversely affected. Please see “Risk Factors – Risks Related to Our Business – Our lack of a significant line of credit could affect our liquidity” and “Risk Factors – Risks Related to Our Offering – If we are unable to repay or redeem the principal amount of debentures or demand notes when due, and we are unable to obtain additional financing or other sources of capital, we may be forced to sell off our loan receivables and other operating assets or we might be forced to cease our operations, and you could lose some or all of your investment.”
Subsequent Events
As of September 26, 2009, we ceased sales operation at our Columbus, Georgia used car lot due to poor sales performance and operating losses. Collection activity will continue at this location. In conjunction with this action, we moved one of our two loan offices in Columbus, Georgia to this facility.
From September 26, 2009 through December 25, 2009, we redeemed $0.3 million more in debentures than we sold and we sold $0.5 million more demand notes than we redeemed. These include amounts that were redeemed through our subsidiary, The Money Tree of Georgia Inc.
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Recent Accounting Pronouncements
Set forth below are recent accounting pronouncements that may have a future effect on operations.
In June 2009, the Financial Accounting Standards Board (FASB) issued new guidance effective for financial statements issued for periods ending after September 15, 2009. “The FASB Accounting Standards Codification” (FASB ASC) establishes the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date, the FASB ASC superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the ASC became non-authoritative. Our adoption of this guidance did not have a material impact on our consolidated financial statements.
In June 2009, the FASB issued revised guidance to improve the reporting for the transfer of financial assets resulting from (1) practices that have developed since the issuance of previous guidance that are not consistent with the original intent and key requirements of that guidance and (2) concerns of financial statement users that many of the financial assets (and related obligations) that have been derecognized should continue to be reported in the financial statements of transferors. These revisions to FASB ASC 860, “Transfers and Servicing,” must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. We do not expect that the adoption of this guidance will have a material impact on our consolidated financial statements.
In June 2009, the FASB issued revised guidance to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. These revisions to FASB ASC 810, “Consolidation,” is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. We do not expect that the adoption of this guidance will have a material impact on our consolidated financial statements.
In April 2009, the FASB issued revised guidance for recognizing and measuring pre-acquisition contingencies in a business combination. These revisions which are a part of FASB ASC 805, “Business Combinations,” addresses application issues raised by preparers, auditors, and members of the legal profession on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This guidance is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. This guidance is not expected to have a material impact on our consolidated financial statements.
In May 2008, the FASB issued revised guidance for accounting for financial guarantee insurance contracts. These revisions which are a part of FASB ASC 944, “Financial Services-Insurance,” clarifies the application of GAAP to financial guarantee insurance contracts included within the scope of the guidance. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years. We do not expect this guidance will have a material impact on our consolidated financial statements.
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In March 2008, the FASB issued new guidance concerning “Disclosures about Derivative Instruments and Hedging Activities,” which is included in FASB ASC 815. This guidance requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. This guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This guidance encourages, but does not require, comparative disclosures for earlier periods at initial adoption. Management does not expect this guidance to have a material impact on our consolidated financial statements.
In December 2007, the FASB issued new guidance for the accounting of noncontrolling interests. This new guidance, which is part of FASB ASC 810, “Consolidations,” establishes accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. We have not yet determined the impact, if any, that this guidance will have on its consolidated financial statements. This guidance is effective for our fiscal year beginning September 26, 2009.
In December 2007, the FASB issued revised guidance for the accounting of business combinations. These revisions to FASB ASC 805, “Business Combinations,” require that the acquisition method of accounting (previously the purchase method) be used for all business combinations and that an acquirer be identified for each business combination. This guidance also establishes principles and requirements for how the acquirer: a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will apply prospectively to business combinations for which the acquisition date is on or after September 26, 2009. While we have not yet evaluated this statement for the impact, if any, that this guidance will have on its consolidated financial statements, we will be required to expense costs related to any acquisitions after September 25, 2009.
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (SFAS 167), which has not been codified. SFAS 167 amends FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (FIN 46(R)) to require an enterprise to qualitatively assess the determination of the primary beneficiary of a variable interest entity (VIE) based on whether the entity (1) has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (2) has the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. Also, SFAS 167 requires an ongoing reconsideration of the primary beneficiary, and amends the events that trigger a reassessment of whether an entity is a VIE. Enhanced disclosures are also required to provide information about an enterprise’s involvement in a VIE. SFAS No. 167 is effective for interim and annual reporting periods ending after November 15, 2009. We are currently evaluating the impact, if any, this standard will have on our consolidated financial statements.
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Critical Accounting Policies
Our accounting and reporting policies conform with GAAP and predominant practice within the financial services industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.
We believe that the determination of our allowance for credit losses involves a higher degree of judgment and complexity than our other significant accounting policies. The allowance for credit losses is calculated with the objective of maintaining a reserve level believed by management to be sufficient to absorb estimated credit losses. Management’s determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio and other relevant factors. However, this evaluation is inherently subjective, as it requires material estimates including, among others, expected default probabilities, loss given default, the amounts and timing of expected future cash flows on impaired loans, and general amounts for historical loss experience. We also consider economic conditions, uncertainties in estimating losses and inherent risks in the loan portfolio. All of these factors may be susceptible to significant change. To the extent actual outcomes differ from management’s estimates, additional provisions for credit losses may be required that would adversely impact earnings in future periods.
Finance receivables are considered impaired (i.e., income recognition ceases) as a result of past-due status or a judgment by management that, although payments are current, such action is prudent. Finance receivables on which payments are past due 90 days or more are considered impaired unless they are well-secured and in the process of collection or renewal. Any losses incurred from finance receivables that are impaired are charged off at 180 days past due. Related accrued interest and fees are reversed against current period income.
When a loan is impaired, interest accrued but uncollected is generally reversed against interest income. Cash receipts on impaired loans are generally applied to reduce the unpaid principal balance.
We recognize deferred tax assets and liabilities for the future tax effects of temporary differences, net operating loss carry-forwards and tax credits. Deferred tax assets are subject to management’s judgment based upon available evidence that future realization is more likely than not. If management determines that we may be unable to realize all or part of net deferred tax assets in the future, a direct charge to income tax expense may be required to reduce the recorded value of the net deferred tax asset to the expected realizable amount.
In 2008, management revised its methodology in determining the adequacy of the allowance for credit losses and now relies much more heavily on current data available rather than simply looking at average charge-offs over the most recent three years. Otherwise, we have not substantially changed any aspect of our overall approach in the application of the foregoing policies. There have been no other material changes in assumptions or estimation techniques utilized as compared to previous years. Please refer to Note 2 in the notes to our audited consolidated financial statements for details regarding our significant accounting policies.
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Impact of Inflation and General Economic Conditions
Although inflation has not had a material adverse effect on our financial condition or results of operations, increases in the inflation rate are generally associated with increased interest rates. A significant and sustained increase in interest rates would likely unfavorably impact our profitability by reducing the interest rate spread between the rate of interest we receive on our customer loans and interest rates we pay to our note holders, banks and finance companies. Inflation may also negatively affect our operating expenses.
Contractual Commitments and Contingencies
Our operations are carried on in branch office locations which we occupy pursuant to lease agreements. The leases typically provide for a lease term of five years. Please see Notes 11 and 14 in the notes to our audited consolidated financial statements for details relating to our rental commitments and contingent liabilities, respectively. Please also see “Properties” and “Certain Relationships and Related Transactions” for further discussion of our leases. Below is a table showing our contractual obligations under current debt financing and leasing arrangements as of September 25, 2009:
Contractual Obligations
| | | | | | | | | | | | | | | |
| | | Payments Due by Period (in thousands) | | | | |
| | | Total | | Less than 1
year | | 1 –
3 years | | 3 –
5 years | | More than
5 years |
Long term debt | | $ | 77,076 | | $ | 23,770 | | $ | 36,815 | | $ | 16,491 | | $ | - |
Operating leases | | | 6,801 | | | 2,753 | | | 2,966 | | | 974 | | | 108 |
| | | | | | | | | | | | | | | |
Total obligations | | $ | 83,877 | | $ | 26,523 | | $ | 39,781 | | $ | 17,465 | | $ | 108 |
| | | | | | | | | | | | | | | |
Quantitative and Qualitative Disclosures About Market Risk
Our profitability and financial performance are sensitive to changes in the U.S. Treasury yields and the spread between the effective rate of interest we receive on customer loans and the interest rates we pay on our borrowings. Our finance income is generally not sensitive to fluctuations in market interest rates. The primary exposure that we face is changes in interest rates on our borrowings. A substantial and sustained increase in market interest rates would likely adversely affect our growth and profitability since we would be required to increase the interest rates we pay to holders of debentures at the end of each interest adjustment period. We would also face pressure to increase interest rates on our demand notes to stay competitive. The overall objective of our interest rate risk management strategy is to mitigate the effects of changing interest rates on our interest expense through the utilization of short-term variable rate debt and medium- and long-term fixed rate debt. We have not entered into any derivative instruments to manage our interest rate risk. Please see Note 7 in the notes to our audited consolidated financial statements for information on our debt, including maturities and interest rates.
BUSINESS
General
We originally incorporated in the State of Georgia in 1987 under the name The Money Tree Inc. Then, in 1995, pursuant to a corporate reorganization, we changed the name of the company to The Money Tree of Georgia Inc. and formed a new parent company called The Money Tree Inc. We have been engaged in the consumer finance business since our inception, primarily making, purchasing and servicing direct consumer loans, consumer sales finance
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contracts and motor vehicle installment sales contracts. Direct consumer loans are direct loans to customers for general use, which are collateralized by existing automobiles or consumer goods, or are unsecured. Consumer sales finance contracts consist of retail installment sales contracts for purchases of specific consumer goods by customers either from our branch locations or from a retail store and are collateralized by such consumer goods. Motor vehicle installment sales contracts are initiated by us or purchased from automobile dealers subject to our credit approval. Direct consumer loans and consumer sales finance contracts originate primarily in our branch office locations. As of September 25, 2009, direct consumer loans comprised 32.9%, motor vehicle installment sales contracts comprised 44.6%, and consumer sales finance contracts comprised 22.5% of the gross amount of our outstanding loans and contracts, excluding amounts in bankruptcy.
As of the date of this prospectus, we operate 102 consumer finance branch offices in cities located throughout Georgia, Florida, Alabama and Louisiana and three used car lots in Georgia.
We operate our business through the following wholly-owned subsidiaries: The Money Tree of Georgia Inc.; The Money Tree of Louisiana, Inc.; The Money Tree of Florida Inc.; Small Loans, Inc.; and Home Furniture Mart Inc. Below is a map showing our branch office locations:
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We fund our loan demand through a combination of cash collections from our loans, proceeds raised from the sale of debentures and demand notes and loans from various banks and other financial institutions.
Our direct consumer loans generally serve individuals with limited access to other sources of consumer credit such as banks, savings and loans, other consumer finance businesses and credit cards. Direct consumer loans are general loans made to people who need money typically for the following purposes:
| | • | | paying some unusual or unforeseen expense; |
| | • | | paying off an accumulation of small debts; or |
| | • | | purchasing furniture and appliances. |
To the extent they are secured at all, direct consumer loans are generally secured by personal property and/or motor vehicles already owned by our customers. Automobile sales finance loans are made primarily in the Bainbridge, Columbus and Dublin, Georgia locations (subsequent to September 25, 2009 the Columbus, Georgia lot was closed). They are typically made in amounts from $3,000 to $30,000 on maturities of 24 to 54 months. Consumer sales finance contracts consist of retail installment sales contracts for purchases of specific consumer goods by customers either at our branch locations or at a retail store. The consumer goods purchased by the customer serve as collateral for these loans. We originate consumer sales finance contracts at our branch offices and sometimes purchase such contracts from retail dealers. These loans have maturities that typically range from three to 36 months and generally do not individually exceed $4,000 in principal amount. We generally charge the maximum interest rates allowed under applicable federal and state laws for our loans.
Prior to making a loan or purchasing a consumer sales finance contract or a motor vehicle installment sales contract, we undertake a credit investigation to determine the income, existing indebtedness, length and stability of employment, and other relevant information concerning the customer. When a loan is made, if it is secured at all, we are granted a security interest in personal property or automobiles of the borrower. In making direct consumer loans, we place emphasis upon the customer’s ability to repay rather than upon the potential resale value of the underlying collateral. In making motor vehicle installment sales and consumer sales finance contracts, however, we place increased emphasis upon the marketability and value of the underlying collateral.
Our business consists mainly of making loans to salaried people and wage earners who depend on their earnings to make their repayments. Our ability to operate on a profitable basis, therefore, depends to a large extent on the continued employment of these people and their ability to meet their obligations as they become due. In the event of a sustained recession or a continued downturn in the U.S. and local economies in which we operate, with resulting unemployment and continued increases in the number of personal bankruptcies, our operations and profitability would continue to be materially and adversely affected. See “Risk Factors – Risks Related to Our Business – We suffered significant credit losses in 2008 and 2009 due to continued weakening economic conditions, and there is no guarantee such credit losses will not continue during this downturn in the economy or that our operations and profitability will not continue to be negatively affected.”
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Below is a chart detailing the relationships of our subsidiaries.
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Lending and Collection Operations
We seek to provide short-term loans to the segment of the population that has limited access to other sources of credit and is considered a higher credit risk. See “Risk Factors – Risks Related to Our Business – Our typical customer base has ‘subprime’ credit ratings and higher than average credit risks which has resulted in increased loan defaults.” In evaluating the creditworthiness of potential customers, we primarily examine the individual’s discretionary income, length of current employment, duration of residence and prior credit experience. We make loans to individuals on the basis of the customer’s discretionary income and other factors and the loans are limited to amounts that we believe the customer can reasonably be expected to repay from that income. All of our new customers are required to complete standardized credit applications in person or by telephone at our local offices. We equip each of our local offices to perform immediate background, employment and credit checks. Generally, we perform loan approval at our headquarters; however, some branch managers have limited authority to approve loans up to certain amounts. When initiating a loan for a new customer, our employees verify the applicant’s employment and credit histories through telephone checks with employers or other employment references and a variety of credit services. We require substantially all new customers to submit a listing of personal property that will be pledged as collateral to secure the loan, but we do not rely on the value of such collateral in the loan approval process and generally do not perfect our security interest in that collateral. Accordingly, if the customer were to default in the repayment of the loan, we may not be able to recover the outstanding loan balance by resorting to the sale of collateral.
We believe that the development and continual reinforcement of personal relationships with customers improve our ability to monitor their creditworthiness, reduce credit risk and generate repeat loans. It is not unusual for us to have made a number of loans to the same customer over the course of several years, many of which were refinanced with a new loan after two or three payments. In determining whether to refinance existing loans, we typically require loans to be current in their payments, and repeat customers are generally required to complete a new credit application if they have not completed one within the prior two years.
In the fiscal year ended September 25, 2009, approximately 34.9% of the total number of loans we made resulted from refinancing of existing loans. Refinancings accounted for approximately 19.9% of the total volume of loans we made during that period. In the fiscal year ended September 25, 2008, approximately 34.4% of the total number of loans and 22.5% of the total volume of loans we made resulted from refinancing of existing loans. A refinancing represents a new loan transaction with an existing customer in which a portion of the new loan is used to repay the balance of an existing loan and the remaining portion is advanced to the customer. We actively market the opportunity to refinance existing loans prior to maturity due to the established credit of these customers. The refinancings result in increased amounts borrowed by the customer and additional fees and income realized by us.
We typically do not perfect our security interest in collateral securing our loans by filing Uniform Commercial Code financing statements. We usually charge a non-filing or non-recording insurance fee in connection with our direct consumer loans. These fees are equal in aggregate amount to the premiums paid by us to purchase non-filing insurance coverage from an unaffiliated insurance company. Under our non-filing insurance coverage, we are reimbursed for losses on direct consumer loans resulting from our policy of not perfecting our security interest in collateral pledged to secure the loans. Non-filing insurance is not available for motor vehicle installment sales contracts and consumer sales finance contracts. We must rely on the collateral
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securing the loan for these two products, and any recovery on such collateral is very uncertain. See “Risk Factors – Risks Related to Our Business – The collectibility of our finance receivables has been severely and negatively affected by general economic conditions and we have not been able to recover the full amount of delinquent accounts by resorting to sale of collateral or receipt of non-filing insurance proceeds.”
Competition
We compete with several national and regional finance companies, as well as a variety of local finance companies, in the communities in which we operate. We believe that we compete effectively in the marketplace primarily based on our emphasis on customer service and the variety of services we provide.
Customer Service Training. We believe intensive training for all employees is integral to the success of our customer service emphasis. Our branch structure includes three positions at each branch office: customer service representative; manager trainee; and branch manager. Customer service representatives meet customers, take payments and input loans. In addition, customer service representatives are responsible for soliciting additional business from existing customers who visit a branch by refinancing current loans. Manager trainees collect past due loans and solicit loans. Branch managers oversee branch operations and the loan making process. When an employee is hired, he or she is required to successfully complete a one- to two-week training course in our headquarters for the position. Branch managers attend both the customer service representative and collection training classes as well as a one-week manager training class (for a total of three weeks of training). Branch managers are also trained on location in their respective branches by one of our traveling trainers and by a regional manager. Designated employees in our headquarters also provide answers to questions by telephone that arise during the course of dealing with customers at the branch offices.
Additional Services to Customers. In addition to the loan services we provide, we offer certain services typically provided by banks or other institutions to consumers who do not have relationships with commercial banks or such other institutions. Please see the “Certain Relationships and Related Transactions” section for a discussion of conflicts and issues arising from various relationships between us, our executive officers and our affiliates. We believe that our ability to service our customers’ needs distinguishes us from most of our competitors that solely offer loan services. Listed below are a number of services offered by us in this capacity.
| | • | | Direct Deposit. We (working in conjunction with our bank) are an approved “Authorized Payment Agent” for Social Security, Veterans Administration (VA), military and retirement benefits. We (working in conjunction with our bank) also accept direct deposit of employee payroll checks for our customers. This service allows customers to elect to receive their benefits or payroll checks at a local branch office. |
| | • | | Sale and Financing of Certain Consumer Goods. In each branch office location (or next door to the branch office in the State of Louisiana), we offer for sale certain furniture, appliances, electronics and other household items. See “Business – Regulation and Supervision – State Laws.” We receive a mark-up for each of the products sold. In addition, we offer financing to eligible consumers desiring to finance the purchase of these consumer goods. |
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| | • | | Motor Club Memberships. We offer motor club membership from Interstate Motor Club, Inc. to all customers possessing a valid driver’s license. Reimbursement benefits to members include: bail bond; emergency road service; wrecker service; emergency ambulance expense; lock and key service; emergency travel expense; and legal fees. We receive a commission on sales of motor club memberships. Interstate Motor Club, Inc. is owned by Bradley D. Bellville, our President and a director; Jefferey V. Martin, one of our directors; and two of Mr. Martin’s siblings. See “Certain Relationships and Related Transactions.��� |
| | • | | Prepaid Telephone Service. We offer prepaid telephone service to all of our customers. We receive a commission for each customer who signs up for the service as well as a commission for each monthly payment collected. The telephone service is provided through Budget Phone, Inc., an unaffiliated entity. |
| | • | | Bank Draft. We offer bank draft services to all of our customers whereby amounts owed to us are automatically debited from the customer’s bank account and paid to us on a regular periodic basis. This results in ease of payment for the customer and, we believe, reduced collections costs and added predictability of cash flow. |
Insurance and Other Benefits
We offer various credit and non-credit insurance products in connection with our loans. We sell insurance products as a licensed agent for a non-affiliated insurance company pursuant to certain underwriting guidelines set by the insurance company. During our fiscal year ended September 25, 2009, we earned $8.4 million in commissions from the sale of insurance products.
We offer credit life insurance, credit accident and sickness insurance and collateral protection insurance. Credit life insurance is elected by those customers who prefer to have their indebtedness covered in the event of death. Credit accident and sickness insurance is available to customers who are gainfully employed for a minimum of 30 hours per week, and provides coverage in the form of continued payments on the loan made by us in the event the customer is unable to work for a period of time. Collateral protection insurance is written to protect our security interest in certain collateral. Examples of covered collateral are automobiles, trucks, travel trailers and certain boats. When a claim is made, the insurance proceeds are payable to us and any excess is payable to the customer. This insurance pays for partial losses as well as total losses of the collateral.
We also offer non-credit accidental death and dismemberment insurance to customers. This type of insurance may have a term shorter or longer than the term of the loan and coverage may exceed the principal amount of the loan. Proceeds of claims are payable to the customers and/or their beneficiaries. Customers are not required to purchase these insurance products from us in order to obtain any other product or service provided by us. See “Business – Regulation and Supervision – State Laws.”
Provision for Credit Losses
Provision for credit losses (sometimes known as bad debt expense) is charged against income in amounts sufficient, in the opinion of senior management, to maintain an allowance for credit losses at a level considered adequate to cover the probable losses inherent in our finance receivable portfolio. Credit loss experience, contractual delinquency of finance receivables, the
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value of underlying collateral and management’s judgment are all factors used in assessing the overall adequacy of the allowance and the resulting provision for credit losses. Charge-offs are typically determined in one of two ways. First, an account that is at least 180 days past due with no payments made within the last 180 days may be charged off. Second, an account may be determined by senior management to be uncollectible under certain circumstances, as in the event of death of the customer who did not elect to purchase credit life insurance for his loan contract or in situations when repossession and sale of collateral occurs on consumer sales finance and motor vehicle installment sales contracts and the balance is not recoverable through legal process or other methods.
In addition to these general means of designating an account to be charged off, branch managers may encounter other situations when charge-off is appropriate. We require that a supervisor visit each branch to review all of their accounts that are potential charge-off accounts on a monthly basis. Then each supervisor meets with the operations manager for a final review. Prior to these visits, the branch manager is responsible for ensuring that all phases of the collection process have been followed. A comprehensive charge-off checklist has been developed to help the branch manager verify that all collection activities and procedures have been followed in order to have that account charged off. Senior management reviews the charge-off checklist to determine whether an account should be charged off or whether the branch manager should undertake further collection measures for the particular account.
Direct consumer loans are charged off net of proceeds from non-filing insurance. We purchase non-filing insurance on certain direct consumer loans in lieu of filing a Uniform Commercial Code financing statement. Premiums collected are remitted to the insurance company to cover possible losses from charge-offs as a result of not recording. Should we ever discontinue our practice of purchasing non-filing insurance, the proceeds from these claims would not be available to us to offset future credit losses and additional provisions for credit losses would be required.
For consumer sales finance and motor vehicle installment sales contracts, we are granted a security interest in the collateral for which the loan was made. In the event of default, the collateral on such contracts may be repossessed at 31 to 60 days’ delinquency (roughly two payments). After repossession, the collateral is sold (typically within 30 days) according to UCC-9 disposition of collateral rules and the proceeds of the sale are applied to the customer’s account. If the likelihood of collection on a judgment is favorable, a suit is filed for the deficiency balance remaining and, if granted, garnishment and/or execution follow for collection of the balance. If the collateral is not conducive to repossession because it is in unmarketable condition, judgment is sought without repossession and sale of collateral. If collection on a judgment is not favorable, the balance of the account is charged off.
For the fiscal years ended September 25, 2009 and 2008, our charge-offs, net of recoveries, were $11.1 million and $8.6 million, respectively. We have experienced a significant increase in net charge-offs in 2008 and 2009 when compared to previous years. The declining economy, increase in cost of consumer goods, and the rise in unemployment levels have had a negative impact on our customer base. These factors have played a role in the significant increase of loan defaults occurring over the past two years. Although we continue to seek remedies through the legal process to attempt to collect past due amounts, sufficient evidence did not exist to defer the losses associated with these defaults.
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Allowance for Credit Losses
The allowance for credit losses (a deduction from finance receivables reported on our Consolidated Balance Sheet and sometimes known as a bad debt reserve) is determined by several factors. Historical loss experience coupled with an evaluation of loan delinquencies are the primary factors in the determination of the allowance for credit losses. An evaluation is performed to compare the amount of accounts charged off, net of recoveries of such accounts, in relation to the average net outstanding finance receivables for the period being reviewed. For the fiscal years ended September 25, 2009 and 2008, the charge-offs, net of recoveries, were $11.1 million and $8.6 million, respectively. These amounts represent 15.8% and 10.8% of the respective year’s net average outstanding receivables.
As discussed above, the poor economic conditions have played a role in the significant increase of loan defaults occurring over the past two years which has resulted in the subsequent increase in the relationship of net charge-offs to net outstanding finance receivables. Management has historically used this methodology to provide an adequate benchmark for determining the allowance due to our loan portfolio in the consumer segment, consisting primarily of a large number of smaller balance homogeneous loans. A review is also performed of loans that comprise the automotive segment to determine if the allowance should be adjusted based on possible exposure related to collectibility of these loans. In accordance with the auto sales contract, we may repossess the collateralized vehicle after 30 days without payment to protect the vehicle’s integrity and to minimize our loss. Net consumer segment charge-offs in fiscal year 2009 were 20.7% of the net outstanding finance receivables. In the automotive segment, net charge-offs to average outstanding receivables were 7.0%.
Based on both the significantly higher levels of 2009 and 2008 charge-offs and the continued extreme adverse economic conditions, management revised its methodology in determining the adequacy of its allowance to rely much more heavily on current data available rather than simply looking at average charge-offs over the most recent three years, as was the past practice. During the fourth quarter of 2008, in conjunction with their initial Sarbanes-Oxley testing of controls over the charge-off process and the completion of its implementation of a new accounting system for loans, management performed an extensive analysis to determine the amount of past due loans over 180 days delinquent which had not been charged-off. The purpose of the analysis was to ascertain branch level controls over the determination of collectibility of past due loans. Although delinquent loans were being actively monitored and collection efforts were taking place including active and ongoing legal processes, management determined that there was not sufficient evidence to support the deferral of probable losses inherent in these loans, especially given the change in the economy and current liquidity crisis.
Although the net charge offs as a percentage of the net finance receivables increased in fiscal year 2009 over the prior year’s percentage, we believe that this year’s percentage is distorted due to the significant decrease in the net outstanding finance receivables and the significant improvement in loan delinquencies during fiscal year 2009. Our liquidity issues have caused us to significantly curtail our historical level of lending and we have also tightened our lending guidelines resulting in fewer delinquencies. Based on these factors, management has decreased the allowance to the 2009 net charge-off rate by 570 basis points in the consumer segment and 50 basis points in the automotive segment to the aforementioned benchmark percentages. At September 25, 2009, we have established an allowance, expressed as a percentage of average net finance receivables, of 15.0% in the consumer segment and 6.5% in the automotive segment. The balance of the allowance for credit losses at September 25, 2009
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and 2008 was $7.4 million and $8.9 million, respectively. While the balance of the allowance for credit losses has decreased, the percentage of the allowance in relation to the net average outstanding receivables has remained relatively constant at 11.7% and 11.6% at September 25, 2009 and 2008, respectively.
Regulation and Supervision
Federal Laws
Our lending operations are subject to extensive federal regulation, including the Truth in Lending Act, the Equal Credit Opportunity Act and the Fair Credit Reporting Act. These laws generally require us to provide certain disclosures to prospective borrowers and protect against discriminatory lending practices and unfair credit practices.
The Truth in Lending Act requires us to make certain disclosures to our customers, including the terms of repayment, the total finance charge, the annual percentage rate charged and other information relating to the loan.
The Equal Credit Opportunity Act prohibits us from discriminating against loan applicants based on race, color, sex, age or marital status. Pursuant to Regulation B promulgated under the Equal Credit Opportunity Act, we are required to make certain disclosures regarding consumer rights and advise consumers whose credit applications are not approved of the reasons for the rejection.
The Fair Credit Reporting Act requires us to provide certain information to consumers whose credit applications are not approved on the basis of a report obtained from a consumer reporting agency. On December 4, 2003, President Bush signed into law the Fair and Accurate Credit Transaction Act. The FACT Act reauthorizes and amends the Fair Credit Reporting Act and permanently extends the state preemption provisions of the Fair Credit Reporting Act. The FACT Act also creates new provisions to strengthen consumer rights by addressing the problem of identity theft, as well as limit the disclosure of medical information for credit purposes.
The Federal Trade Commission (FTC) Credit Practices Rule prevents consumer lenders from using certain household goods as collateral on direct cash loans. We collateralize such loans with non-household goods such as automobiles, boats, mobile homes, and other exempt items.
We are subject to the consumer privacy provisions of the Gramm-Leach-Bliley Act and, as such, are regulated by the FTC. The GLB Act restricts or prohibits our ability to offer non-affiliated third parties access to nonpublic personal information generated by our business. While we do not currently share any such nonpublic personal information with non-affiliated third parties, we may do so in the future. Required compliance with the GLB Act and these rules, or our failure to comply with them, may increase the overall cost to us in providing our products and services and may limit potential future revenue opportunities. In addition, the GLB Act allows states to enact consumer privacy laws that may be more burdensome or restrictive than the GLB Act, the rules promulgated thereunder and other existing federal laws. The GLB Act, the FTC’s rules, or the adoption of other consumer privacy laws or regulations could have a material adverse effect on our business, financial condition and operating results.
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We are subject to the USA PATRIOT Act of 2001, including Section 352 of the Money Laundering Abatement Act, reasonably expected to detect and cause the reporting of suspicious transactions in connection with the sale of debentures and demand notes by us, direct deposits made by customers and the issuance of money orders to customers. In addition to other procedures, for investments or other cash receipts greater than $10,000, we obtain a copy of a valid driver’s license or picture identification and complete the required IRS Form 8300.
State Laws
General
State laws require that each office in which a small loan business is conducted be licensed by the state and that the business be conducted according to the applicable statutes and regulations. The granting of a license depends on the financial responsibility, character and fitness of the applicant, and, where applicable, the applicant must show finding of a need through convenience and advantage documentation. As a condition to obtaining such license, the applicant must consent to state regulation and examination and to the making of periodic reports to the appropriate governing agencies. Licenses are revocable for cause, and their continuance depends upon compliance with the law and regulations issued pursuant thereto. We have never had any of our small loan business licenses revoked.
We are also subject to state regulations governing insurance agents. State insurance regulations require that insurance agents be licensed and limit the premium amount charged for such insurance.
Georgia Laws
Direct consumer loans we make in Georgia are subject to the Georgia Industrial Loan Act. GILA governs loans of $3,000 or less and requires that lenders, like us, who are subject to GILA not loan funds for more than 36 months and 15 days. GILA provides for a maximum rate of interest and specifies permitted additional fees that can be charged for a loan, including loan fees, maintenance fees and late fees. Under GILA, a lender may also sell certain types of insurance. GILA permits us to charge and collect from our customers premiums actually paid for insurance obtained for the customer, provided that the insurance is reasonably related to the type and value of the property issued and the amount and term of the loan, and further provided that the insurance is obtained through an insurance company authorized to do business in Georgia and through a regular insurance agent licensed by the state insurance commissioner.
We also make a comparatively small number of direct consumer loans for amounts greater than $3,000 and for a longer period than 36 months and 15 days. These loans are not subject to GILA restrictions, but are made at an open, negotiated rate which, along with other terms of the loan, is subject only to the general Georgia usury laws.
In connection with the sale and financing of motor vehicles, we are generally subject to the Georgia Motor Vehicle Sales Financing Act. MVSFA requires, among other things, that certain content and notices be present in contracts and regulates the specific manner of execution and delivery of contracts. MVSFA also regulates related insurance purchased, the amount of certain finance charges, the treatment of prepayment and recovery of deficiencies in repossession cases.
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Louisiana Laws
We are registered as a non-depository licensed lender in Louisiana. Direct consumer loans and sales finance loans we make in Louisiana are governed by the Louisiana Consumer Credit Law. The Louisiana Office of Financial Institutions regulates the Louisiana Consumer Credit Law. The Louisiana Consumer Credit Law generally regulates consumer loans made in Louisiana and provides for maximum rates of interest that may be charged based upon outstanding loan balance (the higher the loan balance the less the interest rate allowed to be charged). The Louisiana Consumer Credit Law specifies the permitted additional fees that may be charged in connection with a loan, including loan fees, maintenance fees and late fees. The Louisiana Consumer Credit Law allows us to request or require our customers to provide insurance in connection with consumer credit transactions. However, the maximum rates to be charged for such insurance are set by statute. The Louisiana Consumer Credit Law prevents us from displaying or selling merchandise at our branch office locations and requires that the space in which we make our consumer loans be separated from any location in which we display or sell merchandise by walls that may be broken only by a passageway in which the public does not have access.
Alabama Laws
Direct consumer loans and sales finance loans we make in Alabama are governed by the Alabama Consumer Credit Act and the regulations promulgated thereunder, also referred to as the Mini-Code. The Alabama State Banking Department, Bureau of Loans regulates the Mini-Code. The Mini-Code governs loans of $2,000 or less and provides for maximum finance charges depending on the loan balance and specifies permitted additional fees that may be charged for a loan, including loan fees, maintenance fees and late fees. Furthermore, the Mini-Code requires that we refund or credit certain unearned finance charges when a customer renews or extends a loan. The Mini-Code also requires that loans of less than $1,000 be repaid in substantially equal installments at periodic intervals over a period of not more than 36 months and 15 days for amounts financed of more than $300 and 24 months and 15 days for amounts financed of $300 or less. The Mini-Code permits us to charge and collect insurance premiums from our customers so long as the insurance is offered and written by a licensed insurance company authorized to do business in Alabama. However, the maximum rates to be charged for such insurance are set by statute. The Mini-Code also requires us to obtain the prior written approval of the State Banking Department prior to conducting any other business on the premises.
We also make a small number of consumer loans for amounts greater than $2,000 in Alabama. Such loans are not subject to the Mini-Code, but are made at an open, negotiated rate which, along with other terms of the loan, is subject only to the general Alabama usury laws.
Florida Laws
Direct consumer loans and sales finance loans we make in Florida are governed by the Florida Consumer Finance Act and are regulated by the Florida Department of Banking and Finance. The Florida Consumer Finance Act generally governs loans of less than $25,000 and provides for maximum rates of interest depending upon the loan balance and specifies permitted additional fees that may be charged for a loan, including loan fees, maintenance fees and late fees. The Florida Consumer Finance Act permits us to charge and collect insurance premiums from our customers so long as they are provided under a group or individual insurance policy which complies with the insurance laws of the State of Florida.
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Properties
As of the date of this prospectus, we lease all 102 of our branch office locations, the three used car lots and our corporate headquarters in Bainbridge, Georgia. Martin Family Group, LLLP owns and leases to us the real estate for thirteen of these branch office locations, one used car lot and our corporate headquarters. One of our shareholders is the president of Martin Investments, Inc. which is the managing general partner of Martin Family Group LLLP. In addition, Martin Sublease, L.L.C. leases from the owners, and subleases to us, 53 of these branch office locations and two used car lots.
Legal Proceedings
As of the date of this prospectus, neither we nor any of our officers or directors is a party to, and none of our property is presently the subject of, any pending or threatened legal proceeding or proceeding by a governmental authority that could have a material adverse effect on our business. We are a party to litigation and other contingent assets and liabilities arising in the normal course of business.
Employees
As of September 25, 2009, we had 370 full-time employees and five part-time employees.We do not have employment agreements with any of our employees.
MANAGEMENT
Directors and Officers
The following individuals are our officers and directors. All of the officers and directors may be contacted at our address and telephone number. Their positions and business experience are described below:
| | | | |
Name | | Age | | Position with Company |
| Jefferey V. Martin | | 46 | | Director |
| Bradley D. Bellville | | 43 | | President and Chairman of the Board of Directors |
| Steven P. Morrison | | 51 | | Chief Financial Officer |
| D. Michael Wallace | | 41 | | Vice President – Administration |
| Clayton Penhallegon | | 74 | | Second Vice-President – Investments |
| Dellhia “Cissie” Franklin | | 53 | | Vice President – Customer Service |
| Karen V. Harrell | | 50 | | Vice President – Investments |
| Jennifer L. Ard | | 33 | | Corporate Secretary |
Jefferey V. Martin became a member of the Board of Directors in February 2008. Since October, 1998, Mr. Martin has served as a loan approver in our centralized loan approval department. He is the son of our founder, the late Vance R. Martin. For 11 years prior to joining the Company, Mr. Martin worked in quality control in Columbus, Georgia for Pratt & Whitney, a designer, manufacturer and servicer of aircraft engines, industrial gas turbines and space propulsion systems. Mr. Martin attended Columbus Technical Institute.
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Bradley D. Bellville became our President in August 2007 and was elected Chairman of the Board of Directors in February 2008. He is responsible for the day-to-day responsibilities of running the Company and its strategic direction. Mr. Bellville previously served as our Vice President from 2005 to August 2007, and Vice President – Operations from 1997 to 2005. For the six years prior to 1997, Mr. Bellville held the positions of regional manager, trainer, collector, and branch manager with us. Mr. Bellville received a Bachelor of Business Administration degree in Marketing from Valdosta State University in 1990. Mr. Bellville is a member of the Keep Decatur County Beautiful Board of Directors and the Bainbridge College Foundation Board of Trustees.
Steven P. Morrison became our Chief Financial Officer in 2006. He previously served as our Controller from 2000 to 2006. From 1997 to 2000, Mr. Morrison served as Atlanta Area Controller of Loomis, Fargo & Co., a national armored car service company, where his duties included management of the accounting functions and supervision of the accounting staff for the Atlanta service area. Mr. Morrison received a Bachelor of Business Administration degree from Georgia State University in 1983.
D. Michael Wallace became our Vice President – Administration in August 2007. In this capacity, his duties include oversight of the entire loan department in all four states. Mr. Wallace previously served as our Assistant Vice President – Administration from December 2005 to August 2007, where his duties included assisting the Vice President with oversight of the operations for all company locations, including collections for all branch offices. He also assisted in managing the tax program operations conducted by Cash Check. For the nine years prior to 2005, Mr. Wallace held positions of regional manager and branch manager with our company.
Clayton Penhallegon became Second Vice President – Investments in 2002. Mr. Penhallegon’s duties include traveling to each branch to ensure compliance with company policy regarding the investment program. Mr. Penhallegon began serving as the Executive Director of the Decatur County United Way in 2001. Mr. Penhallegon was in retirement for the two years prior to his becoming Executive Director of the United Way. From 1972 to 1999, Mr. Penhallegon was Executive Director of Georgia Industries for the Blind in Bainbridge, Georgia, under the State of Georgia Department of Labor and has served on the Board of the National Industries For The Blind. Mr. Penhallegon received a bachelor’s degree in Industrial Engineering from Auburn University in 1959 and a master’s degree in Business Administration from the University of Georgia in 1972. Mr. Penhallegon also holds a Certified Public Manager certificate from the University of Georgia Institute of Government. Mr. Penhallegon is a Past President of the Bainbridge-Decatur County Chamber of Commerce, Bainbridge Rotary Club and Georgia Society of Certified Public Managers and Past Chairman of the Board of the Georgia Society of Certified Public Managers.
Dellhia “Cissie” Franklinbecame Vice President – Customer Service in 2002. Her duties include responsibility for all investor contacts and questions, coordination of branch personnel training for investments and oversight of all company advertising. Ms. Franklin previously held the positions of Assistant Vice President – Investments, Loan Approver Assistant and Collector. Her past duties with us have included collections and follow-up of approved loan customers. Ms. Franklin is a Past Assistant Vice President of the Bainbridge Junior Woman’s Club and a past scout leader.
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Karen V. Harrell became our Vice President – Investments in March 2007. Ms. Harrell previously served as our Treasurer from 2005 to 2007, and prior to that, Assistant Corporate Secretary from 2001 until December 2005. She is responsible for the oversight of the funds and securities of the company, including the software and administration of securities. Ms. Harrell also serves as our Lease Administrator. From 1992 to 2001, Ms. Harrell served as Executive Secretary to the President and Assistant Treasurer. From 1982 to 1991, Ms. Harrell served as Textile Manager’s Secretary, Industrial Engineering Secretary and Plant Manager’s Secretary at Amoco Fabrics and Fibers Company in Bainbridge, Georgia. During her employment with Amoco, she served as an officer for the Credit Union Board of Directors for two years.
Jennifer L. Ard was appointed Corporate Secretary in 2008. Ms. Ard’s duties include oversight of loan licensing, insurance and banking relationships for the company. Ms. Ard previously held the positions of Assistant Treasurer with us from 2000 to 2001, Treasurer from 2001 to 2004, Assistant Corporate Secretary from 2005 to 2008 and Vice-President – Individual Retirement Accounts from 2004 to 2009. She has been employed by us since 1999 and prior to that time was primarily a college student. Ms. Ard received a Bachelor of Business Administration degree in Management from Valdosta State University in 1999.
The term of office of each officer expires when a successor is elected and qualified. There is no arrangement or understanding between any officer and any other person pursuant to which the officer was selected. Our directors are not compensated by us in their capacity as directors. Each of the above officers also serves on our Policy Board which meets quarterly and creates and implements our policies and procedures and growth plans.
Indemnification
Pursuant to our Articles of Incorporation and the authority granted in Section 14-2-851 of the Official Code of Georgia Annotated, we have agreed to indemnify our officers and directors against any expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually or reasonably incurred by them in any action, suit or proceeding brought or threatened to be brought against them by reason of the fact that they were our officer or director if they acted in a manner they reasonably believed to be in or not opposed to our best interests, and, with respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful.
COMPENSATION DISCUSSION AND ANALYSIS
This Compensation Discussion and Analysis describes our compensation philosophy and policies for fiscal year 2009 that applied to the executives named below in the Summary Compensation Table (the Named Executive Officers). It explains the structure and rationale associated with each material element of each Named Executive Officer’s total compensation, and it provides important context for the more detailed disclosure tables and specific compensation amounts provided following this discussion and analysis.
The following discussion and analysis contains statements regarding future company performance targets and goals. These targets and goals are disclosed in the limited context of our compensation programs and should not be understood to be statements of management’s expectations or estimates of results or other guidance. We specifically caution investors not to apply these statements to other contexts.
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Objectives of the Named Executive Officer Compensation Program
The objectives of our executive compensation program are to attract, retain and motivate highly talented executives and to align each executive’s incentives with our annual and long-term objectives. Specifically, our executive compensation program is designed to accomplish the following goals and objectives:
| | • | | maintain a compensation program that is equitable in our marketplace; |
| | • | | provide opportunities that integrate pay with the annual and long-term performance goals; |
| | • | | encourage achievement of strategic objectives; |
| | • | | recognize and reward individual initiative and achievements; |
| | • | | maintain an appropriate balance between base salary and short- and long-term incentive opportunity; and |
| | • | | allow us to compete for, retain and motivate talented executives critical to our success and consistent with our quality of life philosophy. |
Determining Named Executive Officer Compensation
We are a family-owned business with W. Derek Martin, our former Chairman of the Board of Directors, and his siblings beneficially owning all of the voting common stock. We do not have an official “compensation committee,” or other committee performing compensation-related activities on behalf of the Board of Directors. Until resigning from his position as President in August 2007, only W. Derek Martin determined the compensation of all of the Named Executive Officers. Thereafter, W. Derek Martin continued to determine Bradley D. Bellville’s compensation until Mr. Martin’s resignation from the Board of Directors in February 2008. With the exception of their own compensation, Mr. Bellville and Jefferey V. Martin, current members of our Board of Directors, now determine the compensation of all of the Named Executive Officers, but may on occasion receive information pertaining to compensation-based decisions from other Named Executive Officers. Mr. Bellville determines Jefferey Martin’s compensation and Jefferey Martin determines Mr. Bellville’s compensation.
Our determination and assessments of executive compensation are primarily driven by the following four factors: (1) market data based on the compensation levels, programs and practices of certain other comparable companies for comparable positions, (2) our financial performance, (3) the Named Executive Officer’s performance, and (4) the Named Executive Officer’s tenure. We believe these four factors provide a reasonably measurable assessment of executive performance in light of building value and creating a healthy financial position for us. The comparable companies that we analyze when making compensation decisions, which operate in similar markets with similar target customers, include 1st Franklin Financial Corporation, Pioneer Financial Services, Inc. and World Acceptance Corporation. Each of these comparable companies is regulated by most, if not all, of the same statutes, rules and regulations that affect us. Other comparable companies that we review are CapitalSouth Bancorp, a financial institution in Alabama with net income levels similar to ours, and PAB Bankshares, Inc., a Georgia-based financial institution with branch locations in several of the cities in which we operate. We rely upon our judgment about each individual Named Executive Officer, and
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not on rigid formulas or short-term changes in business performance, in determining the amount and mix of compensation elements and whether each particular payment or award provides an appropriate incentive and reward for performance that sustains and enhances our long-term growth.
2009 Named Executive Officer Compensation Components
Our executive compensation program consists primarily of base salary and bonuses. The program is complemented with other benefits such as 401(k) matching contributions, commissions, group health insurance, life insurance premiums and medical insurance premiums for all Named Executive Officers, and the provision of a company vehicle, country club memberships, and professional membership dues for certain Named Executive Officers.
Annual Base Salary
We intend to provide our Named Executive Officers with a level of assured cash compensation based on the individual’s position, experience, performance, past and potential contribution to us, and level of responsibility, as well as our overall financial performance. No specific weighting is applied to any one factor considered, and Mr. Bellville and Jefferey Martin used their own judgment and expertise in determining appropriate salaries for 2009 within the parameters of the compensation philosophy. Base salary is one fixed component of our Named Executive Officers’ total direct compensation. With the exception of W. Derek Martin, prior to his resignation, and Mr. Bellville, each Named Executive Officer’s individual performance was reviewed on a yearly basis by Mr. Bellville and the reviews were then discussed between Mr. Bellville and the Named Executive Officers. Prior to his resignation, W. Derek Martin reviewed Mr. Bellville’s annual performance, and as the Sole Director, W. Derek Martin did not receive an annual employment review. Since their appointment to the Board of Directors in February 2008, Mr. Bellville and Jefferey Martin now review on a yearly basis each Named Executive Officer’s individual performance, and the reviews are then discussed between Mr. Bellville and the Named Executive Officers. Mr. Bellville now reviews Jefferey Martin’s performance, and Jefferey Martin now reviews Mr. Bellville’s performance. The outcome of the yearly process is one tool Mr. Bellville and Jefferey Martin utilize in determining appropriate yearly salaries. For fiscal year 2010, the Named Executive Officers’ salaries are as follows:
| | | | | |
| Named Executive Officer | | FY 2010 Salary | | Percentage Increase /
(Decrease) from FY 2009
Salary |
Bradley D. Bellville | | $ | 243,000 | | 2.53% |
Steve Morrison | | $ | 94,800 | | 7.48% |
Natasha J. Wood | | $ | 131,520 | | 2.00% |
David Hill | | $ | 79,452 | | 0.00% |
Claud Haynes | | $ | 106,836 | | 2.00% |
Bonus Awards
In addition to base salary, Named Executive Officers may receive a monthly cash bonus or sales-based commission. Each monthly bonus is determined based on whether the Named Executive Officer meets certain monthly performance goals which may be based on, but are not limited to, cash collection amounts, loan volume, delinquent account reduction and ancillary product sales. Additionally, sales commissions are given, where applicable, for those
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Named Executive Officers who meet certain sales-based goals. The President of the Company, Bradley D. Bellville, will receive a bonus equal to 1% of the Company’s income before income taxes for fiscal year 2010, if any, as an incentive to return the Company to and maintain profitability. For fiscal year 2009, the bonus awards paid to Named Executive Officers were as follows:
| | | |
| Named Executive Officer | | Bonus Award |
Bradley D. Bellville | | $ | 7,219 |
Steve Morrison | | $ | 1,750 |
Natasha J. Wood | | $ | 7,510 |
David Hill | | $ | 42,278 |
Claud Haynes | | $ | 34,472 |
The targets used to determine bonus awards include, but are not limited to:
| | • | | a minimum collection rate of 85% of payments due on finance receivable in a given month, |
| | • | | increased collections of delinquent contract receivables, |
| | • | | increased sales of consumer merchandise above a base amount established each year, |
| | • | | a minimum loan volume of $25,000 for each regional employee, and |
| | • | | increased gross profit on and turnover of motor vehicle inventories. |
Bonus amounts paid to each Named Executive Employee varied by their specific responsibilities, achievement of goals and personal performance. The Company believes the achievement of goals is necessary to continue operations and to reduce losses or return to profitability; therefore, awarding cash incentives to Named Executive Officers for achieving or exceeding these goals provides the Company with increased cash flows, retail sales and gross profits.
401(k) Plan
We sponsor The Money Tree 401(k) Plan in which all qualified employees may participate. The purpose of the 401(k) plan is to provide participating employees with an opportunity to accumulate capital for their future economic security through their elective deferrals and our contributions. We believe this plan creates a strong incentive for participating employees to remain with us and to prepare for their individual futures. This benefits both employee retention and employee morale.
Perquisites and Other Named Executive Officer Benefits
Perquisites and other executive benefits are a part of our Named Executive Officers’ overall compensation. Our Named Executive Officers are eligible for the same group health insurance plan as is provided to other eligible employees. This group health insurance plan includes medical, dental, vision, prescription drug coverage, basic life insurance and short-term disability. We reimburse Named Executive Officers for their life insurance premiums, and pay for varying amounts of medical insurance premiums for all Named Executive Officers. Additionally, company cars are provided to Messrs. Bellville, Hill and Haynes, and we pay monthly country club memberships for Mr. Bellville. Although we reimburse all Named Executive Officers for professional association dues, civic and social club membership dues for networking and entertaining, business-related meals and entertainment, and business-related cellular phone charges, these expenses are also paid on behalf of other employees for business use so we do not consider them personal perquisites.
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For information on the incremental cost of these perquisites and other personal benefits, refer to the Summary Compensation Table. We believe the perquisites we provide to our Named Executive Officers are appropriate to ensure our executive compensation remains competitive.
Employment Agreements
We do not have any employment agreements with any of our Named Executive Officers.
Tax and Accounting Considerations
We consider and review the deductibility of executive compensation under Section 162(m) of the Internal Revenue Code (the Code), which generally provides that we may not deduct certain compensation of more than $1,000,000 that is paid to certain individuals. We do not have any Named Executive Officers that met this limit during fiscal year 2009.
We are aware of the regulatory developments under Code Section 409A, which was enacted as part of the American Jobs Creation Act of 2004. Section 409A imposes substantial limitations and conditions on non-qualified deferred compensation plans, including certain types of equity compensation and separation pay arrangements. We have amended our compensation arrangements to ensure their full compliance with Section 409A.
Conclusion
We believe our executive compensation program is reasonable and competitive with the compensation paid by other competing institutions of similar size and geographic location. The program is designed to reward managers for strong personal and company performance. Our Board monitors the various guidelines that make up the program and reserves the right to adjust them as necessary to continue to meet our objectives.
Compensation Committee Report
In the absence of a standing “compensation committee,” our Board of Directors reviewed and discussed with management the Compensation Discussion and Analysis for fiscal year 2009 as required by Item 402(b) of Regulation S-K and, based on such review and discussions, determined that the Compensation Discussion and Analysis be included in this prospectus.
The Board of Directors:
Bradley D. Bellville, Chairman
Jefferey V. Martin
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Summary Compensation Table
The following table provides certain summary information concerning the annual and long-term compensation paid or accrued by us and our subsidiaries to or on behalf of our Named Executive Officers.
| | | | | | | | | | | | | | |
| Name and Principal Position | | Fiscal Year | | Salary (2) | | Bonus (3) | | All Other
Compensation (4) | | Total |
Bradley D. Bellville, | | 2009 | | $ | 237,500 | | $ | 7,219 | | $ | 9,501 | | $ | 254,220 |
President and Chairman | | 2008 | | $ | 226,000 | | $ | 6,662 | | $ | 15,240 | | $ | 247,902 |
Steve Morrison, | | 2009 | | $ | 92,050 | | $ | 1,750 | | | - | | $ | 93,800 |
Chief Financial Officer | | 2008 | | $ | 86,450 | | $ | 4,400 | | | - | | $ | 90,850 |
Natasha J. Wood, | | 2009 | | $ | 130,123 | | $ | 7,510 | | | - | | $ | 137,633 |
General Counsel | | 2008 | | $ | 126,243 | | $ | 5,957 | | | - | | $ | 132,200 |
David Hill, | | 2009 | | $ | 79,452 | | $ | 42,278 | | | - | | $ | 121,730 |
General Manager(1) | | 2008 | | $ | 49,049 | | $ | 49,049 | | | - | | $ | 126,996 |
Claud Haynes, | | 2009 | | $ | 104,736 | | $ | 34,472 | | | - | | $ | 139,208 |
Operations Manager | | 2008 | | $ | 102,058 | | $ | 27,684 | | | - | | $ | 129,742 |
| (1) | Mr. Hill is the General Manager of Best Buy Autos of Bainbridge Inc., a subsidiary of The Money Tree of Georgia Inc. |
| (2) | The salary amounts shown are equal to the gross salary amounts that were paid to the Named Executive Officers during fiscal year 2009. As yearly salary increases are given, where appropriate, on the anniversary of the employee’s hire date, the salary reported may include a portion of the Named Executive Officer’s previous annual base salary and his or her current annual base salary. |
| (3) | This amount includes both performance-based bonuses, as detailed in “2009 Named Executive Officer Compensation Components – Bonus Awards,” and commissions paid to Mr. Haynes by Home Furniture Mart Inc., a subsidiary of The Money Tree Inc. |
| (4) | The details of “All Other Compensation” are set forth below: |
All Other Compensation
| | | | | | | | | | | | | | | | | |
| Name | | Fiscal
Year | | Company
Vehicle | | Medical
Insurance | | Country Club
Membership | | Life
Insurance | | Total |
Bradley D. Bellville | | 2009 | | $ | 5,300 | | $ | 1,811 | | $ | 1,886 | | $ | 504 | | $ | 9,501 |
| | | 2008 | | $ | 6,552 | | $ | 6,306 | | $ | 1,800 | | $ | 582 | | $ | 15,240 |
PRINCIPAL SHAREHOLDERS
After the death of Vance R. Martin, our founder and former Chief Executive Officer, effective as of August 10, 2006, 1,475 shares of voting common stock were transferred from the Vance Rudolph Martin Defective Grantor Trust u/t/a dated December 28, 2005 to the Vance R. Martin Family Trust u/t/a dated September 20, 2005 (the Trust). W. Derek Martin, our former sole director and son of Vance R. Martin, serves as the sole trustee of the Trust and, accordingly, has the power to vote the shares held by the Trust. The Estate of Vance R. Martin was transferred ownership of the remaining 1,211 shares of voting common stock, effective as of August 10, 2006. See “Certain Relationships and Related Transactions” and “Risk Factors – Risks Related to Our Business – We are controlled by the Martin family and do not have any independent board members overseeing our operations.”
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our officers also serve as the officers of certain of our subsidiaries, and our directors also serve as the directors of each of our subsidiaries. We may be subject to various conflicts of interest in our relationship with Mr. Martin and his other business enterprises. The following is a description of transactions and relationships between us, our executive officers and our directors and each of their affiliates.
Bradley D. Bellville, our President and Chairman of the Board of Directors, owns 40% of the outstanding stock of Interstate Motor Club, Inc. and each of Vance R. Martin’s three children, including Jefferey V. Martin, a director, owns 20%. Interstate Motor Club, Inc. pays us a commission for each membership sold pursuant to an Agency Sales Agreement. During the fiscal year ended September 25, 2009, we received $1.6 million in commissions pursuant to the Agency Sales Agreement.
Martin Family Group, LLLP owns the real estate of thirteen branch offices, one used car lot, and our principal executive offices. The estate of our founder and former CEO, Vance R. Martin, is a limited partner of Martin Family Group, LLLP. Our former sole director, W. Derek Martin, is the president of Martin Investments, Inc. which is the managing general partner of Martin Family Group, LLLP. We have entered into lease agreements whereby rent is paid monthly for use of these locations. In addition, Martin Sublease LLC, which is controlled by Martin Investments, Inc., leases, and then subleases to us, another 53 branch office locations and two used car lots for amounts greater than are paid in the underlying leases. This spread is generally used to cover property operating costs or improvements made directly by these entities. In the opinion of management, rates paid for these subleases are comparable to those obtained from third parties.
DESCRIPTION OF DEBENTURES
The Debentures will be issued under an amended and restated indenture dated as of September 20, 2005 between us and U.S. Bank National Association, as trustee. We do not have any previous relationship with the trustee. The indenture has been filed as an exhibit to the registration statement. You can also obtain a copy of the indenture from us. We have summarized all parts of the indenture that are material to the Debentures. The summary is not complete, and you should read the indenture for provisions that may be important to you.
The Debentures are registered and issued without coupons in series form. Any amount of any series may be issued. There is no limit on the principal amount of Debentures of any series. We may change the interest rates and the maturities of the Debentures and of any prior or subsequent series that may be offered, provided that no such change shall affect any Debenture of any series issued prior to the date of change. We may, at our discretion, limit the maximum amount any investor or related investors may maintain in outstanding Debentures.
The Debentures are our direct obligations but are not secured. Principal and interest are payable at our executive offices in Bainbridge, Georgia. The Debentures are executed by us and authenticated and delivered to the purchaser by us.
The total aggregate maximum principal amount of the Debentures offered under this prospectus is $75,000,000. A minimum initial investment of $500 is required.
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Established Features of Debentures
The Debentures are issued and dated as of the date when purchased. The interest for a Debenture is compounded daily and is payable at any time at your request. This request may be made to us by phone, mail or in person at our executive offices in Bainbridge, Georgia. The Debentures mature four years from date of issuance and will be automatically extended for one additional four-year term, unless submitted for redemption by you prior to 15 days after maturity, as described in “Extension After Maturity.”
Each calendar month we will establish various purchase amounts with varying interest rates and interest adjustment periods for each purchase amount. The purchase amount and the interest adjustment period thereby established are maintained for the term of the Debenture. The interest rate at which the Debenture is sold is set only for the initial interest adjustment period. We offer the Debentures with interest adjustment periods ranging from one year to four years (one year, two years or four years) during which times the interest rate does not vary. The interest adjustment period also sets the period during which redemption of the Debenture may only be made at our discretion. For example, if you select a one-year “interest adjustment period,” the corresponding interest rate will be locked in for one year, and you will not be able to redeem the Debenture at your option until the end of this one-year period without our consent and you will incur a 180-day interest penalty (which means that you will forfeit in principal and interest that amount equal to the interest accrued during the last 180 days of the interest adjustment period).
At the end of each interest adjustment period, the interest rate will automatically adjust to the then-current rate offered for that interest adjustment period. At such time, interest rates will at least be equal to the formula under the Minimum Rate subject to the Ceiling set forth in the table below:
| | | | | |
Debenture | | Minimum Rate | | Ceiling | |
| 1 Year | | Prime Rate minus 4.0% | | 9.5 | % |
| 2 Year | | Prime Rate minus 3.5% | | 10.0 | % |
| 4 Year | | Prime Rate minus 2.0% | | 11.0 | % |
The Prime Rate shall be the prime rate published by The Wall Street Journal. We will notify you by mail of the new interest rate at least 20 days prior to the end of each interest adjustment period. The new interest rate will be the same interest rate that is applicable to all new Debentures being offered during the same month and at the same terms, unless the interest rate is required to be adjusted pursuant to the formula above. Subject to the above formula requirements, we will determine the new interest rate. If you elect to retain the Debenture at the new rate, no action is required by you, as the new rate will become effective as of the first day of the interest adjustment period. If you elect not to accept the new rate, you can require us to redeem the Debenture without penalty as of the end of the previous interest adjustment period by giving us notice of such redemption within 10 days after the end of the interest adjustment period. See “Redemption at Request of Holder Prior to Maturity.”
Debentures with the current established features are available for each calendar month. The current established features are applicable to all Debentures sold by us during that month. We intend to publish this information in a newspaper of general circulation, and in addition, such information may be obtained directly from our website atwww.themoneytreeinc.com or by calling our executive offices in Bainbridge, Georgia at (877) 468-7878 (toll free) or (229) 248-0990 (in Georgia). We will also file with the Securities and Exchange Commission a Rule 424(b)(2) prospectus supplement setting forth the established features upon any change in the established features.
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Subordination
Our obligation to repay the principal of and make interest payments on the Debentures is subordinate in right of payment to all senior debt. This means that if we are unable to pay our debts, when due, all of the senior debt would be paid first, before any payment of principal or interest would be made on the Debentures.
The term “senior debt” means all of our debt created, incurred, assumed or guaranteed by us, except debt that by its terms expressly provides that such debt is not senior in right of payment to the Debentures. Debt is generally any indebtedness, contingent or otherwise, in respect of borrowed money, or evidenced by bonds, notes, debentures or similar instruments or letters of credit and shall include any guarantee of any such indebtedness. Senior debt includes, without limitation, all of our bank and finance company debt and any line of credit we may obtain in the future. Neither the Debentures nor the Demand Notes are senior debt. Any intercompany debt that may be owed by us to any affiliate or subsidiary shall not be considered senior debt. Because The Money Tree of Georgia Inc. is one of our subsidiaries, the Debentures are effectively subordinate to the demand notes and debentures previously issued by this subsidiary. See “Risk Factors – Risks Related to Our Offering – Payment of interest and principal on the Debentures is effectively subordinate to the payment of the secured and unsecured creditors of our subsidiaries, including holders of debentures and demand notes issued by The Money Tree of Georgia Inc.”
Priority
The Debentures have the same priority as all of our other subordinated unsecured general obligations, including the Demand Notes. We may at any time borrow money from a lending institution on a secured or unsecured basis that would have priority over the Debentures.
Redemption by Us Prior to Maturity
We may redeem any Debenture at any time prior to maturity for a redemption price equal to the principal amount plus any unpaid interest thereon to the date of redemption. We will notify holders of Debentures whose Debentures are to be redeemed not less than 30 nor more than 60 days prior to the date fixed for redemption.
Redemption at Request of Holder Prior to Maturity
Subject to the subordination provisions, at your written request, we will redeem any Debenture at the end of any interest adjustment period without penalty for a redemption price equal to the principal amount plus any unpaid interest thereon to the date of redemption. See “Established Features of Debentures.”
At your written request, we may, at our sole option, redeem any Debenture during any interest adjustment period for a redemption price equal to the principal amount plus unpaid interest equal to the stated rate of interest minus a penalty in an amount equal to the interest earned over the last 180 days immediately prior to the redemption date. The penalty will be taken first from any interest accrued but not yet paid on the Debenture, and to the extent such accrued interest does not cover the entire penalty amount, the remainder of the penalty amount shall be reduced from the principal amount of the Debenture.
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All redemptions will be made at our executive offices in Bainbridge, Georgia, either in person or by mail.
Extension After Maturity
The maturity of a Debenture will be automatically extended from the original maturity date for a period equal to the original term of such Debenture, unless the holder submits the Debenture for redemption at maturity by notifying us prior to 15 days after the maturity date or we send the holder of a Debenture notice of our intention to tender the amount due the holder prior to 15 days after maturity. We will provide you notice of the maturity date of your Debenture at least 30 days prior to the maturity date and inform you that your Debenture will be automatically extended unless you notify us otherwise. At this time, we will also provide you with an updated prospectus. In the event of such an extension, all provisions of the Debenture will remain unchanged with the exception of the interest rate, which will be changed in accordance with the interest adjustment provision. The interest adjustment period sets the period during which redemption of the Debenture may only be made at our discretion. For example, if the extended Debenture has a one-year interest adjustment period, the corresponding interest rate will be locked in for one year and you will not be able to redeem the Debenture at your option until the end of this one-year period without our consent and you will incur a 180-day interest penalty (which means that you will forfeit in principal and interest that amount equivalent to the interest accrued during the last 180 days of the interest adjustment period). In no event may the maturity of a Debenture be automatically extended more than once.
No Restrictions on Additional Debt or Business
The indenture does not restrict us from issuing additional securities or incurring additional debt, including senior debt or other secured or unsecured obligations, or restrict the manner in which we conduct our business.
Modification of Indenture
We, together with the trustee, may modify the indenture at any time with the consent of the holders of not less than a majority in principal amount of the Debentures that are then outstanding. However, we and the trustee may not modify the indenture without the consent of each holder affected if the modification:
| | • | | reduces the principal or rate of interest, changes the fixed maturity date or time for payment of interest, or waives any payment of interest on any Debenture; |
| | • | | reduces the percentage of Debenture holders whose consent to a waiver or modification is required; |
| | • | | affects the subordination provisions of the indenture in a manner that adversely affects the rights of any holder; or |
| | • | | waives any event of default in the payment of principal or interest on any Debenture. |
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Without action by you, we and the trustee may amend the indenture or enter into supplemental indentures to clarify any ambiguity, defect or inconsistency in the indenture, to provide for the assumption of the Debentures by any successor to us, to make any change to the indenture that does not adversely affect the legal rights of any Debenture holders, or to comply with the requirements of the Trust Indenture Act of 1939. We will give written notice to you of any amendment or supplement to the indenture or Debentures.
Place, Method and Time of Payment
We will pay principal and interest on the Debentures at our principal executive offices or at such other place as we may designate for that purpose; provided, however, that if we make payments by check, they will be mailed to you at your address appearing in the Debenture register maintained by the registrar. Any payment of principal and interest that is due on a non-business day will be payable by us on the next business day immediately following that non-business day.
Events of Default
An event of default is defined in the indenture as follows:
| | • | | a default in payment of principal or interest on the Debentures when due or payable if such default has not been cured for 30 days; |
| | • | | our becoming subject to certain events of bankruptcy or insolvency; or |
| | • | | our failure to comply with any agreements or covenants in or provisions of the Debentures or the indenture if such failure is not cured or waived within 60 days after we have received notice of such failure from the trustee or from the holders of at least a majority in principal amount of the outstanding Debentures. |
If an event of default occurs and is continuing, the trustee or the holders of at least 25% in principal amount of the then-outstanding Debentures may declare the principal and accrued interest on all outstanding Debentures due and payable. If such a declaration is made we are required to pay the principal and interest on all outstanding Debentures immediately, so long as the senior debt has not matured by lapse of time, acceleration or otherwise. We are required to file annually with the trustee an officer’s certificate that certifies the absence of defaults under the terms of the indenture. We are also required to file with the trustee and the paying agent prompt notice of an event of default under the indenture and any default related to any senior debt.
The indenture provides that the holders of a majority of the aggregate principal amount of the Debentures at the time outstanding may, on behalf of all holders, waive any existing event of default or compliance with any provision of the indenture or the Debentures, except a default in payment of principal and interest on the Debentures or an event of default with respect to a provision that cannot be amended without the consent of each affected holder. In addition, the trustee may waive an existing event of default or compliance with any provision of the indenture or Debentures, except in payments of principal and interest on the Debentures, if the trustee in good faith determines that a waiver or consent is in the best interests of the holders of the Debentures.
65
If an event of default occurs and is continuing, the trustee is required to exercise the rights and duties vested in it by the indenture and to use the same degree of care and skill as a prudent person would exercise under the circumstances in the conduct of his or her affairs. The trustee, however, is under no obligation to perform any duty or exercise any right under the indenture at the request, order or direction of Debenture holders unless the trustee receives indemnity satisfactory to it against any loss, liability or expense. Subject to such provisions for the indemnification of the trustee, the holders of a majority in principal amount of the Debentures at the time outstanding have the right to direct the time, method and place of conducting any proceeding for any remedy available to the trustee. The indenture effectively limits the right of an individual Debenture holder to institute legal proceedings in the event of our default.
Satisfaction and Discharge of Indenture
The indenture may be discharged upon the payment of all Debentures outstanding thereunder or upon deposit in trust of funds sufficient for such payment and compliance with certain formal procedures set forth in the indenture.
Reports
We plan to file annual reports containing audited financial statements and quarterly reports containing unaudited financial information for the first three fiscal quarters of each fiscal year with the SEC while the registration statement containing this prospectus is effective and as long thereafter as we are required to do so. Copies of such reports will be sent to any Debenture holder upon written request.
Service Charges
We reserve the right to assess service charges and fees for issuing Affidavits of Lost Debentures to replace lost or stolen Debentures, to transfer or assign Debentures, or to issue a replacement interest payment check.
Transfer
You may not transfer any Debenture until the registrar has received, among other things, appropriate endorsements and transfer documents and any taxes and fees required by law or permitted by the indenture. The registrar is not required to transfer any Debenture for a period beginning 15 days before the date notice is mailed of the redemption or the maturity of such Debenture and ending on the redemption of such Debenture or 21 days after the maturity date of the Debenture, as appropriate.
Concerning the Trustee
The indenture contains certain limitations on the trustee’s right, should it become one of our creditors, to obtain payment of claims in certain cases or to realize on certain property with respect to any such claim as security or otherwise. The trustee will be permitted to engage in other transactions; however, if it acquires certain conflicting interests and if any of the indenture securities are in default, it must eliminate such conflict or resign.
66
PLAN OF DISTRIBUTION
We are offering up to $75,000,000 in aggregate principal amount of the Debentures. We will offer the Debentures through our designated selling officer, without an underwriter or agent and on a continuous basis. Dellhia “Cissie” Franklin, our Vice President – Customer Service, is the designated selling officer for the Debentures. If Ms. Franklin becomes unavailable, another executive officer will be appointed. Our designated selling officer will meet the requirements of Rule 3a4-1(a)(1), (2), (3) and (4)(ii) of the Securities Exchange Act of 1934, in that:
1. Ms. Franklin is not currently, nor will she be at the time of her participation in the offering, subject to a statutory disqualification, as that term is defined in Section 3(a)(39) of the Securities Exchange Act of 1934;
2. Ms. Franklin will not be compensated in connection with her participation by the payment of commissions or other remuneration based either directly or indirectly on transactions in securities;
3. Ms. Franklin will not be, at the time of her participation, an associated person or a broker/dealer; and
4. Ms. Franklin (A) primarily performs substantial duties for or on behalf of us otherwise than in connection with transactions in securities; (B) is not, and has not been, a broker or dealer, or an associated person of a broker or dealer, within the preceding twelve (12) months; and (C) has not participated in selling an offering of securities for any issuer more than once every twelve (12) months other than in reliance on Paragraphs (a)(4)(i) or (a)(4)(iii) of Rule 3a4-1.
We intend to market the offering primarily by placing advertisements in local newspapers, purchasing roadway sign advertisements and placing signs in our branch office locations in states in which we have properly registered the offering or qualified for an exemption from registration. We may also make oral solicitations in limited circumstances and use other methods of marketing the offering, all in compliance with applicable laws and regulations, including securities laws. We also intend to have certain information relating to our offerings available on our website atwww.themoneytreeinc.com. However, the information contained on this website is not part of this prospectus. While branch office personnel would be happy to provide you with a prospectus and may accept your investment check and documentation, they are not allowed to answer any substantive questions about your investment. If you have any questions about the offering of the Debentures or this prospectus or need additional information, please call our executive office at (877) 468-7878 (toll free) or (229) 248-0990 (in Georgia).
Prospective investors will be required to complete an application and purchaser suitability questionnaire prior to investing in the Debentures. We reserve the right to reject any subscription. If we accept an investment, you should not assume that the Debentures are a suitable and appropriate investment for you.
You will not know at the time of investment whether we will be successful in completing the sale of any or all of the Debentures. We reserve the right to withdraw or cancel the offering at any time. In the event of a withdrawal or cancellation, investments previously received will be irrevocable and no funds will be refunded.
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The Debentures are not listed on any securities exchange, and there is no established trading market for the Debentures.
LEGAL MATTERS
The validity of the Debentures being offered by this prospectus will be passed upon for us by Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, Atlanta, Georgia.
EXPERTS
The consolidated financial statements appearing in this prospectus and registration statement have been audited by Carr, Riggs & Ingram, LLC, an independent registered public accounting firm, to the extent and for the periods indicated in their report appearing elsewhere herein and are included in reliance upon such report and upon the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act of 1933, as amended, with respect to the Debentures offered by this prospectus. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules thereto. Certain items are omitted in accordance with the rules and regulations of the SEC. For further information about us and the Debentures sold in this offering, refer to the registration statement and the exhibits and schedules filed therewith. Statements contained in this prospectus about the contents of any contract or other document referred to are not necessarily complete, and in each instance, if such contract or document is filed as an exhibit, reference is made to the copy of such contract or other documents filed as an exhibit to the registration statement.
A copy of the registration statement, including the exhibits and schedules thereto, may be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site atwww.sec.gov, from which interested persons can electronically access the registration statement, including the exhibits and schedules thereto.
As a result of the offering, we are subject to the full informational requirements of the Securities Exchange Act of 1934. We will continue to fulfill our obligations with respect to such requirements by filing periodic reports and other information with the SEC.
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INDEX TO FINANCIAL STATEMENTS
F-1
Report of Independent Registered Public Accounting Firm
To the Directors and Shareholders
The Money Tree Inc. and subsidiaries
We have audited the accompanying consolidated balance sheets of The Money Tree Inc. and subsidiaries (the “Company”) as of September 25, 2009 and 2008, and the related consolidated statements of operations, shareholders’ deficit, and cash flows for each of the three years in the period ended September 25, 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Money Tree Inc. and subsidiaries as of September 25, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended September 25, 2009, in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements for the year ended September 25, 2009 have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 2. The consolidated financial statements do not contain any adjustments that might result from the outcome of these uncertainties.
/s/ Carr, Riggs & Ingram, LLC
Tallahassee, Florida
December 23, 2009
F-2
The Money Tree, Inc. and Subsidiaries
Consolidated Balance Sheets
| | | | | | | | |
| September 25, | | 2009 | | | 2008 | |
| | |
| | |
Assets | | | | | | | | |
| | |
Cash and cash equivalents | | $ | 2,921,777 | | | $ | 12,541,302 | |
Finance receivables, net | | | 56,282,881 | | | | 67,730,473 | |
Other receivables | | | 716,661 | | | | 956,752 | |
Inventory | | | 2,201,966 | | | | 3,167,021 | |
Property and equipment, net | | | 4,226,555 | | | | 4,906,189 | |
Other assets | | | 1,831,146 | | | | 2,498,205 | |
| | |
Total assets | | $ | 68,180,986 | | | $ | 91,799,942 | |
| | |
| | |
Liabilities and Shareholders’ Deficit | | | | | | | | |
| | |
Liabilities | | | | | | | | |
Accounts payable and other accrued liabilities | | $ | 2,489,269 | | | $ | 3,278,870 | |
Accrued interest payable | | | 13,462,931 | | | | 14,854,877 | |
Demand notes | | | 3,146,707 | | | | 3,658,160 | |
Senior debt | | | 326,517 | | | | 694,890 | |
Variable rate subordinated debentures | | | 73,602,821 | | | | 82,209,211 | |
| | |
Total liabilities | | | 93,028,245 | | | | 104,696,008 | |
| | |
| | |
Commitments and contingencies (see Notes 11 and 14) | | | | | | | | |
| | |
Shareholders’ deficit | | | | | | | | |
Common stock: | | | | | | | | |
Class A voting, no par value; 500,000 shares authorized,
2,686 shares issued and outstanding | | | 1,677,647 | | | | 1,677,647 | |
Class B non-voting, no par value; 1,500,000 shares
authorized, 26,860 shares issued and outstanding | | | - | | | | - | |
Accumulated deficit | | | (26,524,906 | ) | | | (14,573,713 | ) |
| | |
Total shareholders’ deficit | | | (24,847,259 | ) | | | (12,896,066 | ) |
| | |
Total liabilities and shareholders’ deficit | | $ | 68,180,986 | | | $ | 91,799,942 | |
| | |
See accompanying notes to the consolidated financial statements.
F-3
The Money Tree, Inc. and Subsidiaries
Consolidated Statements of Operations
| | | | | | | | | | | | |
| Years ended September 25, | | 2009 | | | 2008 | | | 2007 | |
| | |
| | | |
Interest and fee income | | $ | 15,589,074 | | | $ | 19,280,069 | | | $ | 19,480,740 | |
Interest expense | | | (7,611,185 | ) | | | (8,275,310 | ) | | | (8,025,969 | ) |
| | |
Net interest and fee income before provision
for credit losses | | | 7,977,889 | | | | 11,004,759 | | | | 11,454,771 | |
Provision for credit losses | | | (9,629,722 | ) | | | (13,812,192 | ) | | | (4,982,494 | ) |
| | |
Net revenue (loss) from interest and fees after provision
for credit losses | | | (1,651,833 | ) | | | (2,807,433 | ) | | | 6,472,277 | |
Insurance commissions | | | 8,354,410 | | | | 9,615,005 | | | | 10,120,463 | |
Commissions from motor club memberships
from company owned by related parties | | | 1,601,482 | | | | 1,844,341 | | | | 1,946,476 | |
Delinquency fees | | | 1,561,013 | | | | 1,719,608 | | | | 1,775,728 | |
Income tax service agreement income from
company owned by related parties | | | - | | | | - | | | | 3,310 | |
Other income | | | 529,541 | | | | 647,406 | | | | 747,829 | |
| | |
Net revenue before retail sales | | | 10,394,613 | | | | 11,018,927 | | | | 21,066,083 | |
| | |
| | | |
Retail sales | | | 16,019,081 | | | | 17,164,407 | | | | 19,001,858 | |
Cost of sales | | | (10,365,638 | ) | | | (11,131,463 | ) | | | (12,170,317 | ) |
| | |
Gross margin on retail sales | | | 5,653,443 | | | | 6,032,944 | | | | 6,831,541 | |
| | |
| | | |
Net revenues | | | 16,048,056 | | | | 17,051,871 | | | | 27,897,624 | |
| | |
Operating expenses | | | | | | | | | | | | |
Personnel expense | | | (15,732,538 | ) | | | (15,530,590 | ) | | | (15,349,102 | ) |
Facilities expense | | | (3,981,370 | ) | | | (3,807,540 | ) | | | (3,760,048 | ) |
General and adminstrative expenses | | | (3,062,752 | ) | | | (3,287,831 | ) | | | (3,150,330 | ) |
Other operating expenses | | | (5,649,625 | ) | | | (4,852,247 | ) | | | (4,978,335 | ) |
Impairment loss from writedown of goodwill | | | - | | | | (991,243 | ) | | | (365,824 | ) |
| | |
Total operating expenses | | | (28,426,285 | ) | | | (28,469,451 | ) | | | (27,603,639 | ) |
| | |
Net operating income (loss) | | | (12,378,229 | ) | | | (11,417,580 | ) | | | 293,985 | |
Loss on sale of property and equipment | | | (10,497 | ) | | | (20,980 | ) | | | (19,012 | ) |
| | |
Income (loss) before income tax benefit (expense) | | | (12,388,726 | ) | | | (11,438,560 | ) | | | 274,973 | |
Income tax benefit (expense) | | | 437,533 | | | | (527,806 | ) | | | 100,664 | |
| | |
| | | |
Net income (loss) | | $ | (11,951,193 | ) | | $ | (11,966,366 | ) | | $ | 375,637 | |
| | |
| | | |
Net income (loss) per common share, basic and diluted | | $ | (404.49 | ) | | $ | (405.01 | ) | | $ | 12.71 | |
| | |
See accompanying notes to the consolidated financial statements.
F-4
The Money Tree, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Deficit
| | | | | | | | | | | | | | | | | | |
| | | Common Stock | | | | | | |
| | | Class A Voting | | Class B Non-voting | | | | | Total | |
| | | Shares | | Stated
Value | | Shares | | Stated
Value | | Accumulated
Deficit | | | Shareholders’
Deficit | |
| | | | | | |
Balance at September 25, 2006 | | 2,686 | | $ | 1,677,647 | | 26,860 | | $ | - | | $ | (2,982,984 | ) | | $ | (1,305,337 | ) |
| | | | | | |
Net income | | - | | | - | | - | | | - | | | 375,637 | | | | 375,637 | |
| | |
| | | | | | |
Balance at September 25, 2007 | | 2,686 | | | 1,677,647 | | 26,860 | | | - | | | (2,607,347 | ) | | | (929,700 | ) |
| | | | | | |
Net loss | | - | | | - | | - | | | - | | | (11,966,366 | ) | | | (11,966,366 | ) |
| | |
| | | | | | |
Balance at September 25, 2008 | | 2,686 | | | 1,677,647 | | 26,860 | | | - | | | (14,573,713 | ) | | | (12,896,066 | ) |
| | | | | | |
Net loss | | - | | | - | | - | | | - | | | (11,951,193 | ) | | | (11,951,193 | ) |
| | |
| | | | | | |
Balance at September 25, 2009 | | 2,686 | | $ | 1,677,647 | | 26,860 | | $ | - | | $ | (26,524,906 | ) | | $ | (24,847,259 | ) |
| | |
See accompanying notes to the consolidated financial statements.
F-5
The Money Tree, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
| | | | | | | | | | | | |
| Years ended September 25, | | 2009 | | | 2008 | | | 2007 | |
| | |
| | | |
Cash flows from operating activities | | | | | | | | | | | | |
Net income (loss) | | $ | (11,951,193 | ) | | $ | (11,966,366 | ) | | $ | 375,637 | |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | | | | | | |
Provision for credit losses | | | 9,629,722 | | | | 13,812,192 | | | | 4,982,494 | |
Depreciation | | | 880,119 | | | | 793,776 | | | | 794,418 | |
Amortization | | | 4,524 | | | | 5,714 | | | | 5,714 | |
Impairment loss from write-down of goodwill | | | - | | | | 991,243 | | | | 365,824 | |
Deferred income tax expense (benefit) | | | - | | | | 1,210,000 | | | | (565,000 | ) |
Loss on sale of property and equipment | | | 10,497 | | | | 20,980 | | | | 19,012 | |
Loss on sale of finance receivables | | | 148,063 | | | | - | | | | - | |
Change in assets and liabilities: | | | | | | | | | | | | |
Other receivables | | | 240,091 | | | | (93,396 | ) | | | 151,586 | |
Inventory | | | 965,055 | | | | (110,246 | ) | | | (861,312 | ) |
Other assets | | | 662,535 | | | | (753,777 | ) | | | 360,762 | |
Accounts payable and other accrued liabilities | | | (789,601 | ) | | | (741,186 | ) | | | 494,778 | |
Accrued interest payable | | | (1,391,946 | ) | | | 525,785 | | | | 2,747,680 | |
| | |
| | | |
Net cash (used in) provided by operating activities | | | (1,592,134 | ) | | | 3,694,719 | | | | 8,871,593 | |
| | |
| | | |
Cash flows from investing activities | | | | | | | | | | | | |
Finance receivables originated | | | (58,340,423 | ) | | | (73,335,373 | ) | | | (76,942,622 | ) |
Finance receivables repaid | | | 59,934,161 | | | | 67,630,531 | | | | 72,779,841 | |
Purchase of property and equipment | | | (706,512 | ) | | | (1,586,379 | ) | | | (1,032,849 | ) |
Proceeds from sale of property and equipment | | | 495,530 | | | | 85,319 | | | | 580,338 | |
Proceeds from sale of finance receivables | | | 76,069 | | | | - | | | | - | |
| | |
| | | |
Net cash provided by (used in) investing activities | | | 1,458,825 | | | | (7,205,902 | ) | | | (4,615,292 | ) |
| | |
| | | |
Cash flows from financing activities | | | | | | | | | | | | |
Net proceeds (repayments) on: | | | | | | | | | | | | |
Senior debt | | | (368,373 | ) | | | 183,227 | | | | (156,886 | ) |
Demand notes | | | (511,453 | ) | | | (2,333,214 | ) | | | (2,145,476 | ) |
Repayments on senior subordinated debt | | | - | | | | - | | | | (600,000 | ) |
Repayments on junior subordinated debt to related parties | | | - | | | | - | | | | (370,000 | ) |
Proceeds-variable rate subordinated debentures | | | 10,028,146 | | | | 15,435,214 | | | | 14,132,396 | |
Payments-variable rate subordinated debentures | | | (18,634,536 | ) | | | (15,087,019 | ) | | | (10,181,582 | ) |
| | |
| | | |
Net cash (used in) provided by financing activities | | | (9,486,216 | ) | | | (1,801,792 | ) | | | 678,452 | |
| | |
| | | |
Net change in cash and cash equivalents | | | (9,619,525 | ) | | | (5,312,975 | ) | | | 4,934,753 | |
| | | |
Cash and cash equivalents, beginning of year | | | 12,541,302 | | | | 17,854,277 | | | | 12,919,524 | |
| | |
Cash and cash equivalents, end of year | | $ | 2,921,777 | | | $ | 12,541,302 | | | $ | 17,854,277 | |
| | |
See accompanying notes to the consolidated financial statements.
F-6
The Money Tree, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
| | | | | | | | | |
| Years ended September 25, | | 2009 | | 2008 | | 2007 |
| |
| | | |
SUPPLEMENTAL DISCLOSURE OF | | | | | | | | | |
CASH FLOW INFORMATION: | | | | | | | | | |
| | | |
Cash paid during the year for: | | | | | | | | | |
Interest | | $ | 9,003,131 | | $ | 7,749,525 | | $ | 5,278,289 |
| |
Income taxes | | $ | - | | $ | 268,642 | | $ | 198,897 |
| |
See accompanying notes to the consolidated financial statements.
F-7
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 1 – NATURE OF BUSINESS
The business of The Money Tree Inc. and subsidiaries (the “Company”) consists of the operation of finance company offices which originates direct consumer loans and sales finance contracts in 102 locations throughout Georgia, Alabama, Louisiana and Florida; sales of merchandise (principally furniture, appliances, and electronics) at certain finance company locations; and the operation of three used automobile dealerships in Georgia. The Company also earns revenues from commissions on premiums written for certain insurance products, when requested by loan customers, as an agent for a non-affiliated insurance company. Revenues are also generated from commissions on the sales of automobile club memberships from a company owned by related parties and commissions from sales of prepaid telephone and prepaid cellular services.
The Company’s loan portfolio consists of consumer sales finance contracts receivables and direct consumer loan receivables. Consumer sales finance contracts receivables consist principally of retail installment sale contracts collateralized by used automobiles and consumer goods which are initiated by automobile and consumer good dealerships, subject to credit approval, in the locations where the Company operates offices. Direct consumer loan receivables are loans originated directly to customers for general use which are collateralized by existing automobiles or consumer goods, or are unsecured.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of The Money Tree Inc. and its subsidiaries, all of which are wholly owned by The Money Tree Inc. All significant intercompany accounts and transactions are eliminated in consolidation. Subsequent events have been evaluated through the date the financial statements were issued.
In preparing the consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP), management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheet and the reported amounts of revenues and expenses for the reporting period. Actual results could vary from those estimates. Significant estimates include the determination of the allowance for credit losses relating to the Company’s finance receivables. This evaluation is inherently subjective, and, as such, there is at least a reasonable possibility that recorded estimates could change by a material amount in the near term.
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The operations of the Company in 2009 reflect continued pressure from an uncertain economy and the negative impact of the turmoil in the credit markets. For the years ended September 25, 2009 and 2008, respectively, the Company has incurred net losses of $11,951,193 and $11,966,366, and has had a deficiency in net interest margin (net loss from interest and fees after provision for credit losses) of $1,651,833 and $2,807,433 and, as of September 25, 2009 and 2008, had a shareholders’ deficit of $24,847,259 and $12,896,066, respectively. These factors among others raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time.
The Company has closely monitored and managed its liquidity position, understanding that this is of critical importance in the current economic environment; however, the current economic environment makes the cash forecast difficult to predict. The average term of our direct consumer loans is less than seven months and, therefore, if we anticipate having short-term cash flow problems, we could curtail the amount of funds we loan to our customers and focus on collections to increase cash flow. During the year ended September 25, 2009, the Company reduced its debt and related accrued interest by $10.9 million and tightened its risk management controls related to new loans, resulting in a decrease in loan originations of $15.0 million from the prior year. The Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, originate new loans and to ultimately attain successful operations. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Cash and Cash Equivalents
Cash equivalents are short-term, highly liquid investments with original maturities of three months or less when purchased.
F-8
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Finance Receivables
Finance receivables are stated at the amount of unpaid principal and accrued interest on certain loans where interest is recognized on an interest accrual basis. Finance receivables with precomputed finance charges are stated at the gross amount reduced by unearned interest, unearned insurance commissions and unearned discounts. In addition to these reductions, all finance receivables are stated net of the allowance for credit losses.
For loans acquired at a discount, the initial investment, which is accounted for in the aggregate, includes the amount paid to the seller plus any fees paid or less any fees received. The initial investment frequently differs from the related loan’s principal amount at the date of purchase. This difference is recognized as an adjustment of yield over the life of the loan. All other costs incurred in connection with acquiring loans, or committing to purchase loans are charged to expense as incurred.
Collectibility of the acquired loans is continually evaluated throughout the life of the acquired loan. If upon subsequent evaluation:
| | • | | the estimate of the total probable collections is more favorable, the amount of the discount to be amortized is adjusted accordingly. |
| | • | | the estimate of amounts probable of collection is less favorable, the loans may be considered to be impaired. |
| | • | | it is not possible to estimate the amount and timing of collection, then amortization ceases, and the cost-recovery method is implemented, which requires that all payments be applied to the principal amount of loan first and when that is reduced to zero, any additional amounts are recognized as income. |
Income Recognition
GAAP requires that an interest yield method be used to calculate income recognized on accounts which have precomputed finance charges. An interest yield method is used by the Company on each individual precomputed account to calculate income for ongoing accounts; however, state regulations often allow interest refunds to be made according to the Rule of 78s method for payoffs and renewals when customers take such actions on their accounts. Since the majority of the Company’s precomputed accounts are paid off or renewed prior to maturity, the result is that most precomputed accounts are adjusted to a Rule of 78s basis effective yield. Renewals and refinancings require that the borrower meet the underwriting guidelines similar to a new customer and, as a result, the interest rate and effective yield, as well as the other terms of the refinanced loans are at least as favorable to the lender as comparable loans with customers with similar risks who are not refinancing; therefore, all renewals and refinancings are treated as new loans. Further any unamortized net fees or costs and any prepayment penalties from the original loan are recognized in interest income when the new loan is granted. Rebates of interest, if applicable, are charged to interest income at the time of the new loan. The new loan is originated utilizing a portion of the proceeds to pay off the existing loan and the remaining portion advanced to the customer. The difference between income previously recognized under the interest yield method and the Rule of 78s method is recognized as an adjustment to interest income at the time of the rebate. Adjustments to interest income for the fiscal years ended September 25, 2009, 2008, and 2007 were $1,325,777, $2,227,772, and $2,504,285, respectively.
Recognition of interest income is suspended on accounts with precomputed interest charges when the account becomes more than 90 days delinquent. Accrual of interest income on other finance receivables is suspended when no payment has been made on an account for 60 days or more on a contractual basis. Loans are returned to active status and earning or accrual of income is resumed when all of the principal and interest amounts contractually due are brought current (one or more full contractual monthly payments are received and the account is less than 90 or 60 days contractually delinquent), at which time management believes future payments are reasonably assured. Interest accrued on loans charged off is reversed against interest income in the current period. Any amounts charged off that related to prior periods are not material for any period presented.
For loans acquired at a discount, the initial investment, which is accounted for in the aggregate, includes the amount paid to the seller plus any fees paid or less any fees received. The initial investment frequently differs from the related loan’s principal amount at the date of purchase. This difference is recognized as an adjustment of yield over the life of the loan. All other costs incurred in connection with acquiring loans, or committing to purchase loans are charged to expense as incurred.
F-9
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The discount on an acquired loan is amortized over the period in which the payments are probable of collection. Discounts are amortized using the interest method.
The Company receives commissions from independent insurers for policies issued to finance customers. These insurance commissions are deferred and systematically amortized to income over the life of the related insurance contract since the insurance and lending activities are integral parts of the same transaction. Commissions for credit and non-credit insurance products are recognized over the risk period based on the method applicable to the insurance coverage’s risk exposure, which generally coincides with the term of the related loan contract. Insurance commissions for products that have constant risk exposure are earned using the straight-line method. Insurance commissions for insurance products with declining risk exposure or coverage are recognized using the Rule of 78s method that approximates the interest method. The auto and accidental death and dismemberment policies are earned over the policy’s predetermined schedule of coverage. The Company retains advance commissions that vary by products at the time the policies are written. Retrospective commissions are paid to the Company on an earned premium basis, net of claims and other expenses. Contingencies exist only to the extent of refunds due on early termination of policies that exceed the amount of advanced commissions retained. These refunds are netted against the gross amount of premiums written.
Commissions earned from Interstate Motor Club, Inc., a related party, on the sale of motor club memberships are recognized at the time the membership is sold. The Company has no obligations related to refund of membership fees on cancellations. Claims filed by members are the responsibility of the issuer of the membership.
Retail sales include sales of used automobiles, home furnishings, electronic equipment, and appliances. Warranties on selected used vehicles are available as an add-on item through an unaffiliated warranty company. Home furnishings, electronic equipment and appliances carry their own manufacturer’s warranties. Retail sales revenues are recognized at the time of sale when title and risk of loss is transferred to the customer. Warranty revenues are recognized at the time of sale.
Loan Origination Fees and Costs
Non-refundable loan origination fees and certain direct origination costs are deferred and recognized as an adjustment of the loan yield over the contractual life of the related loan. Unamortized amounts are recognized in income at the time loans are renewed or paid in full.
Credit Losses
The allowance for credit losses is determined by several factors. Recent historical loss experience is the primary factor in the determination of the allowance for credit losses. An evaluation is performed to compare the amount of accounts charged off, net of recoveries of such accounts, in relation to the average net outstanding finance receivables for the period being reviewed. Further, the Company adjusts the allowance to reflect any enhancement or deterioration in the quality of the loan portfolio, primarily based on a review of loan delinquencies. Management believes this evaluation process provides an adequate allowance for credit losses due to the Company’s loan portfolio in the consumer segment consisting of a large number of smaller balance homogeneous loans. Also, a review of loans that comprised the automotive segment is performed monthly to determine if the allowance should be adjusted based on possible exposure related to collectibility of these loans. In accordance with the auto sales contract, the Company may repossess the collateralized vehicle after 30 days without payment to protect the vehicle’s integrity and to minimize the Company’s loss. Management routinely evaluates the inherent risks and change in the composition of the loan portfolio based on their extensive experience in the consumer finance industry in consideration of estimating the adequacy of the allowance. Also considered are delinquency trends, economic conditions, and industry factors. In most instances, an insurance product is purchased in conjunction with the loan. In the event of the death or injury of the customer or damage to pledged collateral, the proceeds from the claims would generally pay off or continue payments on the loan, thereby negating any consideration in the allowance determination. In other instances, a non-filing or non-recording insurance policy is made in conjunction with the loan, (see description of non-filing insurance below). Proceeds from these claims are netted against charge-offs as recoveries in the determination of the allowance. Provisions for credit losses are charged to income in amounts sufficient to maintain an allowance for credit losses at a level considered adequate to cover the probable loss inherent in the finance receivable portfolio. Each month, regional management reviews potential accounts for charge-off with local branch management. A comprehensive charge-off checklist is utilized to assist management in verifying that all collection activity and procedures have been followed. Once completed, it is submitted to senior management for final review.
F-10
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company’s charge-off policy requires that balances be charged off when they are 180 days since last payment, unless upon review by management, the balance is deemed collectible by garnishment of wages, bankruptcy proceedings or other collection methods. Also, an account may be charged off if it is determined by senior management that the account is uncollectible due to certain circumstances, as in the death of the customer who did not elect to purchase credit life insurance for the loan contract or in situations when repossession and sale of collateral occurs and the balance is not recoverable through the legal process or other methods. Loan balances charged off exclude accrued interest, which is reversed against interest income. Accounts that are to be disbursed under a plan of bankruptcy are monitored separately from other accounts. The charge-off policy generally coincides with the bankruptcy plan period while payments are scheduled under the loan. Direct consumer loans are charged off net of proceeds from non-filing insurance (see discussion below). For consumer sales finance and motor vehicle installment sales contracts, the Company is granted a security interest in the collateral for which the loan was made. In the event of default, the collateral on such contracts may be repossessed at 31 to 60 days delinquency (roughly two payments). After repossession, the collateral is sold according to UCC-9 disposition of collateral rules and the proceeds of the sale are applied to the customer’s account. If the likelihood of collection on a judgment is favorable, a suit is filed for the deficiency balance remaining and, if granted, garnishment and/or execution follows for collection of the balance. If the collateral is not conducive for repossession because of it being in unmarketable condition, judgment is sought without repossession and sale of collateral. If collection on a judgment is not favorable, the balance of the account is charged off.
Non-file insurance
Non-file premiums are charged on direct consumer loans at inception and renewal in lieu of recording and perfecting the Company’s security interest in the assets pledged on such loans and are remitted to a third-party insurance company for non-filing insurance coverage. Non-file insurance is not available for motor vehicle installment sales contracts and consumer sales finance contracts. Certain losses related to such direct consumer loans, which are not recoverable through life, accident and health, property, or unemployment insurance claims, are reimbursed through non-filing insurance claims subject to policy limitations. These limitations include: no loans may exceed $5,000 to any one customer; no loans may exceed 36 months in term; and no fraudulent loans. When accounts covered by non-filing insurance are deemed uncollectible, they are charged off and the claim filed with the insurance carrier, usually within 30 days. Proof of coverage and documentation of collection activity are submitted with the claim. Recoveries from non-filing insurance are reflected in the accompanying consolidated financial statements as a reduction in credit losses and receivables related to such claim recoveries are included in other receivables (see Note 3).
Inventory
Inventory is valued at the lower of cost (first-in, first-out basis) or market. Inventory generally consists of home furnishings, electronics and used automobiles.
Property and equipment, net
Property and equipment are recorded at cost. Depreciation is provided by the straight-line method over the estimated useful lives of the assets ranging from 5 to 10 years. Leasehold improvements are recorded at cost and amortized using the straight-line method over the shorter of the estimated useful life of the assets or the lease term. Such amortization is included in depreciation expense in the accompanying consolidated statements of cash flows.
Goodwill
During the years ended September 25, 2008 and 2007 in conjunction with the annual goodwill impairment testing process, the Company recorded impairment charges in the amount of $991,243 and $365,824, respectively. No goodwill was recorded as of September 25, 2009 and 2008.
F-11
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impairment of Long-Lived Assets (other than Goodwill)
The Company periodically evaluates whether events or circumstances have occurred that indicate the carrying amount of long-lived assets and certain identifiable intangible assets may warrant revision or may not be recoverable. When factors indicate that these long-lived assets and certain identifiable intangible assets should be evaluated for possible impairment, the Company assesses the recoverability by determining whether the carrying value of such assets will be recovered through the future undiscounted cash flows expected from the use of the asset and its eventual disposition. Amounts paid for covenants not to compete are amortized on a straight-line basis over a period of seven years. In management’s opinion, there has been no impairment of value of long-lived assets and certain identifiable intangible assets at September 25, 2009 and 2008.
Income Taxes
The Company provides for income taxes under the asset and liability method. Under this method, deferred income taxes are recognized for expected future tax consequences of temporary differences between financial statement carrying amounts and the tax bases of existing assets and liabilities using tax rates expected in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
Governmental Regulation
The Company is subject to various state and federal laws and regulations which, among other things, impose limits on interest rates, other charges, insurance premiums, and require licensing and qualification.
Fair Value of Financial Instruments
The following methods and assumptions are used by the Company in estimating fair values for financial instruments:
Cash and cash equivalents. Cash consists of cash on hand and with banks, either in commercial accounts, or money market accounts. The carrying value of cash and cash equivalents approximates fair value due to the relatively short period between the acquisition of the instruments and their expected realization.
Finance receivables. Finance receivables are reported net of unearned interest, insurance commissions, discounts and allowances for credit losses, which are considered short-term because the average life is approximately five months, assuming prepayments. The discounted cash flows of the loans approximate the net finance receivables.
Subordinated debentures. Fair value approximates $76,372,000 compared to the carrying value of $73,603,000 based on the calculation of the present value of the expected future cash flows associated with the debentures. The debenture holder also may redeem the debenture for 100 percent of the principal on demand subject to a 90-day interest penalty.
Demand notes. The carrying value approximates fair value due to rights to withdraw the balance at any time.
Senior debt. The carrying value of the Company’s senior debt approximates fair value due to the relatively short period of time from origination of the instruments and their expected payment.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expenses totaled $412,823, $616,055, and $704,972 for the years ended September 25, 2009, 2008, and 2007, respectively.
Allocation of Expenses to Related Party
Employees of The Money Tree Inc. perform services in support of Interstate Motor Club, an affiliate of the Company. The Company assesses Interstate Motor Club an administration fee that approximates the cost of support provided to Interstate Motor Club.
Net Income (loss) Per Common Share
Net income (loss) per common share is computed based upon weighted–average common shares outstanding. There are no potentially dilutive securities issued or outstanding.
Reclassifications
Certain reclassifications have been made to the prior period financial statements to conform with the method of presentation used in 2009.
F-12
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued new guidance effective for financial statements issued for periods ending after September 15, 2009. “The FASB Accounting Standards Codification” (FASB ASC) establishes the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date, the FASB ASC superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the ASC became non-authoritative. Our adoption of this guidance did not have a material impact on our consolidated financial statements.
In June 2009, the FASB issued revised guidance to improve the reporting for the transfer of financial assets resulting from (1) practices that have developed since the issuance of previous guidance that are not consistent with the original intent and key requirements of that guidance and (2) concerns of financial statement users that many of the financial assets (and related obligations) that have been derecognized should continue to be reported in the financial statements of transferors. These revisions to FASB ASC 860, “Transfers and Servicing,” must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. We do not expect that the adoption of this guidance will have a material impact on our consolidated financial statements.
In June 2009, the FASB issued revised guidance to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. These revisions to FASB ASC 810, “Consolidation,” is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. We do not expect that the adoption of this guidance will have a material impact on our consolidated financial statements.
In April 2009, the FASB issued revised guidance for recognizing and measuring pre-acquisition contingencies in a business combination. These revisions, which are a part of FASB ASC 805, “Business Combinations,” address application issues raised by preparers, auditors, and members of the legal profession on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This guidance is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. This guidance is not expected to have a material impact on our consolidated financial statements.
In May 2008, the FASB issued revised guidance for accounting for financial guarantee insurance contracts. These revisions, which are a part of FASB ASC 944, “Financial Services-Insurance,” clarify the application of GAAP to certain financial guarantee insurance contracts included within the scope of the guidance. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years. We do not expect this guidance will have a material impact on our consolidated financial statements.
In March 2008, the FASB issued new guidance concerning “Disclosures about Derivative Instruments and Hedging Activities,” which is included in FASB ASC 815. This guidance requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. This guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This guidance encourages, but does not require, comparative disclosures for earlier periods at initial adoption. Management does not expect this guidance to have a material impact on our consolidated financial statements.
In December 2007, the FASB issued new guidance for the accounting of noncontrolling interests. This new guidance, which is part of FASB ASC 810, “Consolidations,” establishes accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. We have not yet determined the impact, if any, that this guidance will have on its consolidated financial statements. This guidance is effective for our fiscal year beginning September 26, 2009.
F-13
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In December 2007, the FASB issued revised guidance for the accounting of business combinations. These revisions to FASB ASC 805, “Business Combinations,” require that the acquisition method of accounting (previously the purchase method) be used for all business combinations and that an acquirer be identified for each business combination. This guidance also establishes principles and requirements for how the acquirer: a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will apply prospectively to business combinations for which the acquisition date is on or after September 26, 2009. While we have not yet evaluated this statement for the impact, if any, that this guidance will have on its consolidated financial statements, we will be required to expense costs related to any acquisitions after September 25, 2009.
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (SFAS 167), which has not been codified. SFAS 167 amends FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (FIN 46(R)) to require an enterprise to qualitatively assess the determination of the primary beneficiary of a variable interest entity (VIE) based on whether the entity (1) has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (2) has the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. Also, SFAS 167 requires an ongoing reconsideration of the primary beneficiary, and amends the events that trigger a reassessment of whether an entity is a VIE. Enhanced disclosures are also required to provide information about an enterprise’s involvement in a VIE. SFAS No. 167 is effective for interim and annual reporting periods ending after November 15, 2009. We are currently evaluating the impact, if any, this standard will have on our consolidated financial statements.
NOTE 3 – FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES
Finance receivables consisted of the following:
| | | | | | | | |
| September 25, | | 2009 | | | 2008 | |
| | |
Finance receivables, direct consumer | | $ | 29,019,345 | | | $ | 41,654,302 | |
Finance receivables, consumer sales finance | | | 15,176,373 | | | | 16,793,743 | |
Finance receivables, auto sales finance | | | 30,151,923 | | | | 30,707,329 | |
| | |
Total gross finance receivables | | | 74,347,641 | | | | 89,155,374 | |
Unearned insurance commissions | | | (1,996,614 | ) | | | (2,793,425 | ) |
Unearned finance charges | | | (9,243,875 | ) | | | (10,621,034 | ) |
Accrued interest receivable | | | 608,209 | | | | 865,885 | |
| | |
Finance receivables, before
allowance for credit losses | | | 63,715,361 | | | | 76,606,800 | |
Allowance for credit losses | | | (7,432,480 | ) | | | (8,876,327 | ) |
| | |
Finance receivables, net | | $ | 56,282,881 | | | $ | 67,730,473 | |
| | |
F-14
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 3 – FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES (CONTINUED)
An analysis of the allowance for credit losses is as follows:
| | | | | | | | | | | | |
| Years ended September 25, | | 2009 | | | 2008 | | | 2007 | |
| | |
Beginning balance | | $ | 8,876,327 | | | $ | 3,710,679 | | | $ | 3,139,359 | |
| | | |
Provisions for credit losses | | | 9,629,722 | | | | 13,812,192 | | | | 4,982,494 | |
| | | |
Charge-offs, net of insurance recoveries | | | (11,367,962 | ) | | | (8,825,129 | ) | | | (4,583,650 | ) |
| | | |
Recoveries | | | 231,604 | | | | 196,208 | | | | 181,218 | |
| | | |
Other | | | 62,789 | | | | (17,623 | ) | | | (8,742 | ) |
| | |
Ending balance | | $ | 7,432,480 | | | $ | 8,876,327 | | | $ | 3,710,679 | |
| | |
It is the Company’s experience that a substantial portion of the loan portfolio generally is renewed or repaid before contractual maturity dates. During the years ended September 25, 2009, 2008, and 2007, cash collections of receivables (including principal, renewals and finance charges since finance receivables are recorded and tracked at their gross precomputed amount) totaled $76,482,092, $87,883,004, and $95,928,382, respectively, and these cash collections were 104 percent, 102 percent, and 102 percent of average gross finance receivable balances (excluding accounts in bankruptcy), respectively.
Finance receivables in a non-accrual status, including accounts in bankruptcy, totaled $14,477,879, $17,778,974, and $20,132,798 at September 25, 2009, 2008 and 2007, respectively. Because of their delinquency status, the Company considers these loans to be impaired. Consequently, the amount of loans in non-accrual status represents the Company’s investment in impaired loans. Since the Company’s portfolio of finance receivables is comprised primarily of small balance, homogenous loans, individual impairment is not performed, but rather evaluated as a group. The allowance for credit losses related to the entire portfolio of loans was $7,432,480, $8,876,327, and $3,710,679 at September 25, 2009, 2008 and 2007, respectively.
The Company ceases the accrual of interest income on interest-bearing finance receivables when no payment has been made for 60 days or more. Recognition of interest income suspends at 90 days contractual delinquency on accounts with precomputed interest charges. Suspended interest totaled $916,802, $1,167,918, and $1,149,545 for the years ended September 25, 2009, 2008, and 2007, respectively.
Finance receivables charged off are net of proceeds from non-filing insurance. The Company purchases non-filing insurance on certain loans in lieu of filing a Uniform Commercial Code lien. Premiums collected are remitted to the insurance company to cover possible losses from charge-offs as a result of not recording these liens. Amounts recovered from non-filing insurance claims totaled $2,795,483, $2,543,460, and $2,569,924, for the years ended September 25, 2009, 2008, and 2007, respectively. If this insurance product was discontinued, these proceeds would not be available to offset future credit losses and additional provisions for credit losses would be required. Amounts receivable from the insurance company related to non-filing insurance claims were $421,132 and $514,897 at September 25, 2009 and 2008, respectively, and are included in other receivables in the accompanying consolidated balance sheets.
NOTE 4 – INVENTORY
Inventory consisted of the following:
| | | | | | |
| September 25, | | 2009 | | 2008 |
| |
Used automobiles | | $ | 1,159,473 | | $ | 1,529,078 |
Home furnishings and electronics | | | 1,042,493 | | | 1,637,943 |
| |
Total inventory | | $ | 2,201,966 | | $ | 3,167,021 |
| |
F-15
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 5 – PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
| | | | | | | | |
| September 25, | | 2009 | | | 2008 | |
Furniture and equipment | | $ | 6,025,876 | | | $ | 6,978,418 | |
Airplane | | | 174,000 | | | | 609,155 | |
Automotive equipment | | | 550,181 | | | | 543,154 | |
Leasehold improvements | | | 2,833,393 | | | | 2,698,008 | |
| | | 9,583,450 | | | | 10,828,735 | |
Accumulated depreciation | | | (5,356,895 | ) | | | (5,922,546 | ) |
Total property and equipment, net | | $ | 4,226,555 | | | $ | 4,906,189 | |
| | |
Depreciation expense totaled $880,119, $793,776, and $794,418, for the years ended September 25, 2009, 2008 and 2007, respectively.
NOTE 6 – ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES
Accounts payable and other accrued liabilities consisted of the following:
| | | | | | |
| September 25, | | 2009 | | 2008 |
Accounts payable | | $ | 150,144 | | $ | 271,815 |
Insurance payable, loan related | | | 414,470 | | | 639,167 |
Accrued payroll | | | 472,772 | | | 507,484 |
Accrued payroll taxes | | | 35,642 | | | 38,420 |
Money orders | | | - | | | 530,888 |
Sales tax payable | | | 1,072,007 | | | 1,210,579 |
Other liabilities | | | 344,234 | | | 80,517 |
Total accounts payable and other accrued liabilities | | $ | 2,489,269 | | $ | 3,278,870 |
| |
F-16
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 7 – DEBT
Debt consisted of the following:
| | | | | | |
| September 25, | | 2009 | | 2008 |
| |
| | |
| Senior debt: due to banks and commercial finance companies, collateralized by inventory and certain automotive equipment, and certain notes include personal guarantees of a shareholder, interest at prime plus 2%, due in 2010. The carrying values of the collateral at September 25, 2009 and 2008 were $362,206 and $725,910, respectively. | | $ | 326,517 | | $ | 694,890 |
| |
| | |
Total senior debt | | | 326,517 | | | 694,890 |
| |
| | |
| Variable rate subordinated debentures issued by The Money Tree of Georgia Inc.: due to individuals, unsecured, interest at 4.25% to 9.6%, due at various dates through 2013. | | | 30,730,844 | | | 45,020,194 |
| | |
| Variable rate subordinated debentures issued by The Money Tree Inc.: due to individuals, unsecured, interest at 6.0% to 8.7%, due at various dates through 2013. | | | 42,871,977 | | | 37,189,017 |
| |
| | |
Total subordinated debentures | | | 73,602,821 | | | 82,209,211 |
| |
| | |
| Demand notes issued by The Money Tree of Georgia Inc.: due to individuals, unsecured, interest at 3.0% to 4.0%, due on demand. | | | 441,747 | | | 613,442 |
| | |
| Demand notes issued by The Money Tree Inc.: due to individuals, unsecured, interest at 3.0% to 4.0%, due on demand. | | | 2,704,960 | | | 3,044,718 |
| |
| | |
Total demand notes | | | 3,146,707 | | | 3,658,160 |
| |
Total debt | | $ | 77,076,045 | | $ | 86,562,261 |
| |
There are no pre-payment penalties on the senior debt or subordinated debt. At the Company’s discretion, these debt obligations could be satisfied by paying the outstanding principal balance plus accrued interest.
Effective December 25, 2005, the Company terminated the sale of debentures and demand notes through its subsidiary, The Money Tree of Georgia Inc. and commenced the sale of debentures and demand notes from the parent company.
Interest on the debentures is earned daily and is payable at any time upon request of the holder. Interest on the demand notes is payable only at the time demand is made by the holder for repayment of the note.
F-17
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 7 – DEBT (CONTINUED)
The debentures may be redeemed at the holder’s option at the end of the interest adjustment period selected (one year, two years or four years) or at maturity. Redemption prior to maturity or interest adjustment period is at the Company’s discretion and subject to a 90 day interest penalty. Demand notes may be redeemed by holders at any time. The Company intends to meet its obligation to repay such debt with cash generated from sales of the debentures and demand notes, cash on hand, income from operations or working capital.
Our obligations with respect to the debentures and demand notes are governed by the terms of indenture agreements with U.S. Bank National Association, as trustee. Under the indentures, in addition to other possible events of default, if we fail to make a payment of principal or interest under any debenture or demand note and this failure is not cured within 30 days, we will be deemed in default. Upon such a default, the trustee or holders of 25% in principal of the outstanding debentures or demand notes could declare all principal and accrued interest immediately due and payable. Since our total assets do not cover these debt payment obligations, we would most likely be unable to make all payments under the debentures or demand notes when due, and we might be forced to cease our operations.
Aggregate debt maturities at September 25, 2009 are as follows:
| | | | | | | | | | | | | | | |
| | | 2010 | | 2011 | | 2012 | | 2013 | | Total |
| |
Senior debt, banks and finance companies | | $ | 326,517 | | $ | - | | $ | - | | $ | - | | $ | 326,517 |
Variable rate subordinated debentures | | | 20,296,448 | | | 15,974,606 | | | 20,840,806 | | | 16,490,961 | | | 73,602,821 |
Demand notes | | | 3,146,707 | | | - | | | - | | | - | | | 3,146,707 |
| |
| | $ | 23,769,672 | | $ | 15,974,606 | | $ | 20,840,806 | | $ | 16,490,961 | | $ | 77,076,045 |
| |
Interest expense totaled $7,611,185, $8,275,310, and $8,025,969, for the years ended September 25, 2009, 2008 and 2007, respectively.
NOTE 8 – COMMON STOCK
The common stock of the Company is comprised of the following: Class A voting shares, no par value, 500,000 authorized, 2,686 shares issued and outstanding; and Class B non-voting shares, no par value, 1,500,000 authorized, 26,860 shares issued and outstanding.
NOTE 9 – INCOME TAXES
The Company accounts for income taxes in accordance with ASC 740, “Income Taxes”; accordingly deferred income taxes are provided at the enacted marginal rates on the difference between the financial statement and income taxes bases of assets and liabilities. Deferred income tax provisions or benefits are based on the change in the deferred tax assets and liabilities from period to period.
F-18
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The provision for income taxes for the years ended September 25, 2009, 2008 and 2007 consisted of the following:
| | | | | | | | | | | | |
| Years ended September 25 , | | 2009 | | | 2008 | | | 2007 | |
| | |
Current tax expense (benefit) | | | | | | | | | | | | |
Federal | | $ | (437,533 | ) | | $ | (626,984 | ) | | $ | 393,010 | |
State | | | - | | | | (55,210 | ) | | | 71,326 | |
| | |
Total current | | | (437,533 | ) | | | (682,194 | ) | | | 464,336 | |
Deferred income tax expense (benefit) | | | | | | | | | | | | |
Federal | | | (3,492,000 | ) | | | (3,050,000 | ) | | | (297,000 | ) |
State | | | (744,000 | ) | | | (590,000 | ) | | | (52,588 | ) |
(Decrease) increase in valuation allowance | | | 4,236,000 | | | | 4,850,000 | | | | (215,412 | ) |
| | |
Total deferred | | | - | | | | 1,210,000 | | | | (565,000 | ) |
| | |
Total provision (benefit) | | $ | (437,533 | ) | | $ | 527,806 | | | $ | (100,664 | ) |
| | |
|
The income tax provision differs from the amount of income tax determined by applying the U.S. federal rate of 34% to pretax income for the years ended September 25, 2009, 2008 and 2007 due to the following: | |
Years ended September 25, | | | 2009 | | | | 2008 | | | | 2007 | |
| | |
Income tax expense at Federal statutory income tax rates | | $ | (4,212,167 | ) | | $ | (3,889,111 | ) | | $ | 93,491 | |
Increase (decrease) in income taxes resulting from: | | | | | | | | | | | | |
State income taxes , net of federal tax benefit | | | (490,594 | ) | | | (452,967 | ) | | | 10,889 | |
Non-deductible expenses | | | 23,807 | | | | 15,966 | | | | 19,207 | |
Increase (decrease) in valuation allowance | | | 4,236,000 | | | | 4,850,000 | | | | (215,412 | ) |
Other | | | 5,421 | | | | 3,918 | | | | (8,839 | ) |
| | |
Total provision (benefit) | | $ | (437,533 | ) | | $ | 527,806 | | | $ | (100,664 | ) |
| | |
Net deferred tax assets consist of the following components : | | | | | | | | | | | | |
September 25, | | | 2009 | | | | 2008 | | | | | |
| | | | | | |
Deferred tax liability: | | | | | | | | | | | | |
Property and equipment | | $ | 472,000 | | | $ | 564,000 | | | | | |
| | | | | | |
| | | 472,000 | | | | 564,000 | | | | | |
Deferred tax assets : | | | | | | | | | | | | |
Allowance for credit losses | | | 2,973,000 | | | | 3,551,000 | | | | | |
Net operating loss carryforwards | | | 6,888,000 | | | | 1,918,000 | | | | | |
Interest income | | | 154,000 | | | | 86,000 | | | | | |
Insurance commissions | | | 695,000 | | | | 949,000 | | | | | |
Goodwill and intangible assets | | | 352,000 | | | | 414,000 | | | | | |
| | | | | | |
| | | 11,062,000 | | | | 6,918,000 | | | | | |
| | | | | | |
Net deferred tax assets | | | 10,590,000 | | | | 6,354,000 | | | | | |
Valuation allowance | | | (10,590,000 | ) | | | (6,354,000 | ) | | | | |
| | | | | | |
Net deferred tax assets, less valuation allowance | | $ | - | | | $ | - | | | | | |
| | | | | | |
F-19
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 9 – INCOME TAXES (CONTINUED)
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and tax planning strategies in making this assessment. In order to fully realize the deferred tax asset, the Company will need to generate future taxable income prior to the expiration of the deferred tax assets governed by the tax code.
At the end of the fiscal year 2009, the Company’s statements of operations reflected cumulative losses in recent years, as that term is used in ASC 740. The Company therefore considered such cumulative losses and other evidence affecting the assessment of the realizability of the net deferred tax assets and concluded that it was no longer more likely than not that the net deferred tax assets were realizable based on the guidance provided in ASC 740. Accordingly, the Company increased the valuation allowance to fully offset the net deferred tax assets.
The Company has available at September 25, 2009, unused Federal operating loss and charitable carryforwards of $15,997,023 and unused state operating loss and charitable carryforwards of $24,141,956 that expire in various amounts in years from 2010 through 2029.
NOTE 10 – RELATED PARTY TRANSACTIONS
Related party transactions and balances consisted of the following:
| | | | | | | | | |
| As of, or for the years ended September 25, | | 2009 | | 2008 | | 2007 |
| |
Interest expense, junior subordinated debt, related parties | | $ | - | | $ | - | | $ | 6,941 |
| | | |
Rent expense, companies controlled by shareholders | | | 2,180,780 | | | 2,150,371 | | | 2,033,291 |
| | | |
Motor club commissions earned by The Money Tree Inc. and Subsidiaries represents sales of motor club memberships with the Company acting as agent for an affiliate owned by a shareholder and other related parties | | | 1,601,482 | | | 1,844,341 | | | 1,946,476 |
| | | |
Income tax service agreement income from affiliated company owned by a shareholder and other related parties | | | - | | | - | | | 3,310 |
Martin Family Group, LLLP owns the real estate of thirteen branch offices, one used car lot, and the Company’s principal executive offices. The estate of the Company’s founder and former CEO is a limited partner of Martin Family Group, LLLP and also is the holder of the majority of the Company’s common stock. A Company shareholder is the president of Martin Investments, Inc. which is the managing general partner of Martin Family Group, LLLP. The Company has entered into lease agreements whereby rent is paid monthly for use of these locations. In addition, Martin Sublease LLC leases, and then subleases to the Company, another 53 branch office locations and two used car lots for amounts greater than are paid in the underlying leases. This spread is generally to cover property operating cost or improvements made directly by these entities. In the opinion of management, rates paid for these are comparable to those obtained from third parties. A Company shareholder is the president of Martin Investments, Inc., the company which ultimately controls Martin Sublease LLC.
The Company receives commissions from sales of motor club memberships from an entity, owned by the Company’s President and late founder’s three children (of which one is a Director) pursuant to an Agency Sales Agreement.
F-20
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 11 – OPERATING LEASES
The Company leases office locations under various non-cancelable agreements that require various minimum annual rentals.
Future minimum rental commitments at September 25, 2009 were as follows:
| | | | | | | | | |
Year Ending September 25 | | Companies controlled
by related parties | | Other | | Total |
| |
2010 | | $ | 1,948,032 | | $ | 804,596 | | $ | 2,752,628 |
2011 | | | 1,326,471 | | | 651,148 | | | 1,977,619 |
2012 | | | 587,607 | | | 400,311 | | | 987,918 |
2013 | | | 309,905 | | | 291,762 | | | 601,667 |
2014 | | | 216,865 | | | 155,653 | | | 372,518 |
Thereafter | | | 11,600 | | | 96,549 | | | 108,149 |
| |
| | $ | 4,400,480 | | $ | 2,400,019 | | $ | 6,800,499 |
| |
Substantially all of the lease agreements are for a five-year term with one or more renewal options at end of the initial term. Rental expense totaled $2,981,593, $2,891,508, and $2,818,172, for the years ended September 25, 2009, 2008, and 2007, respectively.
NOTE 12 – CONCENTRATION OF CREDIT RISK
The Company’s portfolio of finance receivables is with consumers living throughout Georgia, Louisiana, Alabama and Florida, and consequently such consumers’ ability to honor their installment contracts may be affected by economic conditions in these areas. On sales finance contracts and certain other loans, the Company has access to any collateral supporting these receivables through repossession. Finance receivables are collateralized by personal property, automobiles, real property and mobile homes. On unsecured loans, a non-filing insurance policy is generally obtained so that in the event of default, a claim can be filed in order to recover the unpaid balance.
The Company maintains demand deposits with financial institutions. The Company’s policy is to maintain its cash balances at reputable financial institutions insured by the Federal Deposit Insurance Corporation (FDIC), which provides $250,000 of insurance coverage on each customer’s cash balances. At times during the years ended September 25, 2009 and 2008 the Company’s cash balances exceeded the FDIC insured coverage at certain financial institutions.
NOTE 13 – RETIREMENT PLAN
The Company has a 401(k) retirement plan and trust. The plan covers substantially all employees, subject to attaining age 21 and completing 1 year of service with the Company. Under the plan, an employee may contribute up to 15 percent of his or her compensation, with the Company matching 25 percent of these contributions up to a maximum of 6 percent of the employee’s compensation.
Retirement plan expense totaled $44,851, $47,337, and $32,946, for the years ended September 25, 2009, 2008, and 2007, respectively.
NOTE 14 – CONTINGENT LIABILITIES
The Company is a party to litigation arising in the normal course of business. With respect to all such lawsuits, claims, and proceedings, the Company establishes reserves when it is probable a liability has been incurred and the amount can reasonably be estimated. In the opinion of management, the resolution of such matters will not have a material effect on the consolidated financial statements.
F-21
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 15 – DISCRETIONARY BONUSES
From time to time, the Company pays discretionary bonuses to its employees. The amount of these bonuses charged to operating expenses was $2,295,975, $2,243,839, and $2,075,668, for the years ended September 25, 2009, 2008, and 2007, respectively.
NOTE 16 – SEGMENT FINANCIAL INFORMATION
ASC 280, “Segment Reporting”, requires companies to determine segments based on how management makes decisions about allocating resources to segments and measuring their performance.
The Company has two reportable segments: Consumer Finance and Sales and also Automotive Finance and Sales.
Consumer finance and sales segment
This segment is comprised of original core operations of the Company: the small consumer loan business in the four states in which the Company operates. The 102 offices that make up this segment are similar in size and in the market they serve. All, with few exceptions, offer consumer goods for sale acting as an agent for another subsidiary of the Company, Home Furniture Mart Inc., which is aggregated in this segment since its sales are generated through these finance offices. This segment is structured with branch management reporting through a regional management level to an operational manager and ultimately to the chief operating decision maker.
Automotive finance and sales segment
This segment is comprised of three used automobile sales locations and offers financing in conjunction with these sales. These locations target similar customers in the Bainbridge, Columbus and Dublin, Georgia markets and surrounding areas who generally cannot qualify for traditional financing. The sales and the financing organizations are aggregated in the segment. A general manager is responsible for sales and finance administration at each of the locations and reports to an operational manager and ultimately to the chief operating decision maker.
Accounting policies of the segments are the same as those described in the summary of significant accounting policies. Performance is measured by various factors such as segment profit, loan volumes and delinquency and loss management. All corporate expenses are allocated to the segments. Provisions for income taxes are not allocated to segments.
F-22
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 16 – SEGMENT FINANCIAL INFORMATION (CONTINUED)
| | | | | | | | | | | | |
| Year ended September 25, 2009 | | Consumer Finance
& Sales Division | | | Automotive Finance
& Sales Division | | | Total
Segments | |
| | |
(In Thousands) | | | | | | | | | | | | |
Interest and fee income | | $ | 12,585 | | | $ | 3,004 | | | $ | 15,589 | |
Interest expense | | | (5,288 | ) | | | (2,323 | ) | | | (7,611 | ) |
| | |
Net interest and fee income before provision for credit losses | | | 7,297 | | | | 681 | | | | 7,978 | |
Provision for credit losses | | | (7,776 | ) | | | (1,854 | ) | | | (9,630 | ) |
| | |
Net interest and fee loss | | | (479 | ) | | | (1,173 | ) | | | (1,652 | ) |
Insurance commissions | | | 8,136 | | | | 218 | | | | 8,354 | |
Commissions from sale of motor club memberships from affiliated company | | | 1,601 | | | | - | | | | 1,601 | |
Delinquency fees | | | 1,437 | | | | 124 | | | | 1,561 | |
Other income | | | 510 | | | | 21 | | | | 531 | |
| | |
Net revenues (loss) before retail sales | | | 11,205 | | | | (810 | ) | | | 10,395 | |
| | |
| | | |
Gross margin on retail sales | | | 2,911 | | | | 2,742 | | | | 5,653 | |
| | |
| | | |
Segment operating expenses | | | (24,706 | ) | | | (3,720 | ) | | | (28,426 | ) |
| | |
Segment operating loss | | $ | (10,590 | ) | | $ | (1,788 | ) | | $ | (12,378 | ) |
| | |
| | | |
Depreciation | | $ | 514 | | | $ | 75 | | | $ | 589 | |
(included in segment operating expenses) | | | | | | | | | | | | |
| | | |
Total segment assets | | $ | 39,019 | | | $ | 25,236 | | | $ | 64,255 | |
| | | |
Capital expenditures | | $ | 338 | | | $ | 13 | | | $ | 351 | |
| | | |
| RECONCILIATION: | | | | | | | | 2009 | |
| | |
Depreciation: | | | | | | | | | | | | |
Segment depreciation | | | | | | | | | | $ | 589 | |
Depreciation at corporate level | | | | | | | | | | | 291 | |
| | | | | | | | | | | | |
Total depreciation | | | | | | | | | | $ | 880 | |
| | | | | | | | | | | | |
Total assets for reportable segments | | | | | | | | | | $ | 64,255 | |
| | | |
Cash and cash equivalents at corporate level | | | | | | | | | | | 345 | |
Other receivables at corporate level | | | | | | | | | | | 717 | |
Property and equipment, net at corporate level | | | | | | | | | | | 1,033 | |
Other assets at corporate level | | | | | | | | | | | 1,831 | |
| | | | | | | | | | | | |
Consolidated assets | | | | | | | | | | $ | 68,181 | |
| | | | | | | | | | | | |
| | | |
Total capital expenditures for reportable segments | | | | | | | | | | $ | 351 | |
Capital expenditures at corporate level | | | | | | | | | | | 356 | |
| | | | | | | | | | | | |
Total capital expenditures | | | | | | | | | | $ | 707 | |
| | | | | | | | | | | | |
F-23
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 16 – SEGMENT FINANCIAL INFORMATION (CONTINUED)
| | | | | | | | | | | | |
| Year ended September 25, 2008 | | Consumer Finance
& Sales Division | | | Automotive Finance
& Sales Division | | | Total
Segments | |
| | |
(In Thousands) | | | | | | | | | | | | |
Interest and fee income | | $ | 15,904 | | | $ | 3,376 | | | $ | 19,280 | |
Interest expense | | | (5,974 | ) | | | (2,301 | ) | | | (8,275 | ) |
| | |
Net interest and fee income before provision for credit losses | | | 9,930 | | | | 1,075 | | | | 11,005 | |
Provision for credit losses | | | (12,260 | ) | | | (1,552 | ) | | | (13,812 | ) |
| | |
Net interest and fee loss | | | (2,330 | ) | | | (477 | ) | | | (2,807 | ) |
Insurance commissions | | | 9,084 | | | | 531 | | | | 9,615 | |
Commissions from sale of motor club memberships from affiliated company | | | 1,844 | | | | - | | | | 1,844 | |
Delinquency fees | | | 1,616 | | | | 104 | | | | 1,720 | |
Other income | | | 625 | | | | 22 | | | | 647 | |
| | |
Net revenues before retail sales | | | 10,839 | | | | 180 | | | | 11,019 | |
| | |
| | | |
Gross margin on retail sales | | | 3,286 | | | | 2,747 | | | | 6,033 | |
| | |
| | | |
Segment operating expenses | | | (24,769 | ) | | | (3,701 | ) | | | (28,470 | ) |
| | |
Segment operating loss | | $ | (10,644 | ) | | $ | (774 | ) | | $ | (11,418 | ) |
| | |
| | | |
Depreciation | | $ | 389 | | | $ | 90 | | | $ | 479 | |
(included in segment operating expenses) | | | | | | | | | | | | |
| | | |
Total segment assets | | $ | 51,990 | | | $ | 26,451 | | | $ | 78,441 | |
| | | |
Capital expenditures | | $ | 1,132 | | | $ | 13 | | | $ | 1,145 | |
| | | |
RECONCILIATION: | | | | | | | | | | | 2008 | |
| | |
Depreciation: | | | | | | | | | | | | |
Segment depreciation | | | | | | | | | | $ | 479 | |
Depreciation at corporate level | | | | | | | | | | | 314 | |
| | | | | | | | | | | | |
Total depreciation | | | | | | | | | | $ | 793 | |
| | | | | | | | | | | | |
| | | |
Total assets for reportable segments | | | | | | | | | | $ | 78,441 | |
Cash and cash equivalents at corporate level | | | | | | | | | | | 8,527 | |
Other receivables at corporate level | | | | | | | | | | | 957 | |
Property and equipment, net at corporate level | | | | | | | | | | | 1,377 | |
Other assets at corporate level | | | | | | | | | | | 2,498 | |
| | | | | | | | | | | | |
Consolidated assets | | | | | | | | | | $ | 91,800 | |
| | | | | | | | | | | | |
| | | |
Total capital expenditures for reportable segments | | | | | | | | | | $ | 1,145 | |
Capital expenditures at corporate level | | | | | | | | | | | 441 | |
| | | | | | | | | | | | |
Total capital expenditures | | | | | | | | | | $ | 1,586 | |
| | | | | | | | | | | | |
F-24
The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 16 – SEGMENT FINANCIAL INFORMATION (CONTINUED)
| | | | | | | | | | | | |
| Year ended September 25, 2007 | | Consumer Finance
& Sales Division | | | Automotive Finance
& Sales Division | | | Total
Segments | |
| | |
(In Thousands) | | | | | | | | | | | | |
Interest and fee income | | $ | 16,064 | | | $ | 3,417 | | | $ | 19,481 | |
Interest expense | | | (5,708 | ) | | | (2,318 | ) | | | (8,026 | ) |
| | |
Net interest and fee income before provision for credit losses | | | 10,356 | | | | 1,099 | | | | 11,455 | |
Provision for credit losses | | | (3,712 | ) | | | (1,270 | ) | | | (4,982 | ) |
| | |
Net interest and fee income (loss) | | | 6,644 | | | | (171 | ) | | | 6,473 | |
Insurance commissions | | | 9,569 | | | | 551 | | | | 10,120 | |
Commissions from sale of motor club memberships from affiliated company | | | 1,946 | | | | - | | | | 1,946 | |
Delinquency fees | | | 1,713 | | | | 63 | | | | 1,776 | |
Income tax service agreement from affiliated company | | | 3 | | | | - | | | | 3 | |
Other income | | | 731 | | | | 17 | | | | 748 | |
| | |
Net revenues before retail sales | | | 20,606 | | | | 460 | | | | 21,066 | |
| | |
| | | |
Gross margin on retail sales | | | 2,986 | | | | 3,846 | | | | 6,832 | |
| | |
| | | |
Segment operating expenses | | | (23,639 | ) | | | (3,965 | ) | | | (27,604 | ) |
| | |
Segment operating profit (loss) | | $ | (47 | ) | | $ | 341 | | | $ | 294 | |
| | |
| | | |
Depreciation | | $ | 423 | | | $ | 103 | | | $ | 526 | |
(included in segment operating expenses) | | | | | | | | | | | | |
| | | |
Total segment assets | | $ | 62,836 | | | $ | 28,077 | | | $ | 90,913 | |
| | | |
Capital expenditures | | $ | 173 | | | $ | 76 | | | $ | 249 | |
| | | |
| RECONCILIATION: | | | | | | | | 2007 | |
| | |
Depreciation: | | | | | | | | | | | | |
Segment depreciation | | | | | | | | | | $ | 526 | |
Depreciation at corporate level | | | | | | | | | | | 268 | |
| | | | | | | | | | | | |
Total depreciation | | | | | | | | | | $ | 794 | |
| | | | | | | | | | | | |
| | | |
Total assets for reportable segments | | | | | | | | | | $ | 90,913 | |
| | | |
Cash and cash equivalents at corporate level | | | | | | | | | | | 9,762 | |
Other receivables at corporate level | | | | | | | | | | | 861 | |
Employee receivables at corporate level | | | | | | | | | | | 2 | |
Property and equipment, net at corporate level | | | | | | | | | | | 1,286 | |
Deferred income taxes at corporate level | | | | | | | | | | | 1,210 | |
Other assets at corporate level | | | | | | | | | | | 1,750 | |
| | | | | | | | | | | | |
Consolidated assets | | | | | | | | | | $ | 105,784 | |
| | | | | | | | | | | | |
| | | |
Total capital expenditures for reportable segments | | | | | | | | | | $ | 249 | |
Capital expenditures at corporate level | | | | | | | | | | | 784 | |
| | | | | | | | | | | | |
Total capital expenditures | | | | | | | | | | $ | 1,033 | |
| | | | | | | | | | | | |
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The Money Tree Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 17 – SUBSEQUENT EVENTS
As of September 26, 2009, we ceased sales operation at our Columbus, Georgia used car lot due to poor sales performance and operating losses. Collection activity will continue at this location. In conjunction with this action, we moved one of our two loan offices in Columbus, Georgia to this facility.
As of November 25, 2009, we had redeemed $0.4 million more in debentures than we had sold and we had sold $0.1 million more demand notes than we had redeemed. These include amounts that were redeemed through our subsidiary, The Money Tree of Georgia Inc.
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THE MONEY TREE INC.
$75,000,000 Series B Variable Rate Subordinated Debentures
PROSPECTUS
January _____, 2010
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
| Item 13. | Other Expenses of Issuance and Distribution |
The following table sets forth expenses and costs payable by the Registrant expected to be incurred in connection with the issuance and distribution of the securities described in this registration statement. All amounts are estimated except for the Securities and Exchange Commission’s registration fee.
| | | |
| | | Amount |
Registration fee under Securities Act | | $ | 1,376 |
Legal fees and expenses | | | 300,000 |
Accounting fees and expenses | | | 150,000 |
Printing expenses | | | 40,000 |
Advertising expenses | | | 100,000 |
Trustee fees | | | 13,500 |
Miscellaneous expenses | | | 10,124 |
| | | |
Total | | $ | 615,000 |
| | | |
| Item 14. | Indemnification of Directors and Officers |
The Registrant is organized under the laws of the State of Georgia and is governed by the Georgia Business Corporation Code, as in effect or hereafter amended (“Corporation Code”). Section 14-2-852 of the Corporation Code requires that the Registrant indemnify a director “who was wholly successful, on the merits or otherwise, in the defense of any proceeding to which he or she was a party because he or she was a director of the corporation against reasonable expenses incurred by a director in connection with the proceeding.” Section 14-2-857 of the Corporation Code requires that a corporation indemnify officers under the same standard.
Section 14-2-851 of the Corporation Code provides that the Registrant may indemnify a director or officer who is a party to a proceeding against liability incurred in the proceeding if (i) the director or officer conducted himself or herself in good faith; and (ii) the director or officer reasonably believed: (A) in the case of conduct in his or her official capacity, that such conduct was in the best interests of the corporation; (B) in all other cases, that such conduct was at least not opposed to the best interests of the corporation; and (C) in the case of any criminal proceeding, that the individual had no reasonable cause to believe such conduct was unlawful.
The Registrant’s Articles of Incorporation provide that no director shall have any personal liability to the Registrant or its shareholders for monetary damages for breach of duty of care or the other duties of a director except (i) for any appropriation, in violation of his or her
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duties, of any business opportunity of the Registrant, (ii) for acts or omissions that involve intentional misconduct or a knowing violation of law, or (iii) for any transaction from which the director derived an improper personal benefit. These provisions may limit the Registrant and its shareholders from holding a director personally liable for certain acts or omissions.
The Registrant may maintain directors and officers liability insurance, which insures against liabilities that directors or officers of the Registrant may incur in such capacities.
| Item 15. | Recent Sales of Unregistered Securities |
None.
| Item 16. | Exhibits and Financial Statement Schedules. |
The following documents are filed as exhibits to this registration statement:
| | |
Exhibit No. | | Description |
| |
| 3.1 | | Articles of Incorporation of The Money Tree Inc. (filed as Exhibit 3.1 to the Form S-1 Registration Statement of The Money Tree Inc., Commission File No. 333-122531, on February 4, 2005 and incorporated herein by reference) |
| |
| 3.2 | | Amendment to Articles of Incorporation of The Money Tree Inc. (filed as Exhibit 3.2 to the Form S-1 Registration Statement of The Money Tree Inc., Commission File No. 333-122531, on February 4, 2005 and incorporated herein by reference) |
| |
| 3.3 | | Bylaws of The Money Tree Inc. (filed as Exhibit 3.3 to the Form S-1 Registration Statement of The Money Tree Inc., Commission File No. 333-122531, on February 4, 2005 and incorporated herein by reference) |
| |
| 3.4 | | Amendment to Bylaws of The Money Tree Inc. (filed as Exhibit 3.4 to the Form S-1 Registration Statement of The Money Tree Inc., Commission File No. 333-122531, on February 4, 2005 and incorporated herein by reference) |
| |
| 3.5 | | Amendment to Bylaws of The Money Tree Inc. (filed as Exhibit 3.5 to the Form S-1 Registration Statement of The Money Tree Inc., Commission File No. 333-157701, on March 4, 2009 and incorporated herein by reference) |
| |
| 4.1 | | Amended and Restated Indenture between The Money Tree Inc. and U.S. Bank National Association dated September 20, 2005 (filed as Exhibit 4.1 to Amendment No. 4 to the Form S-1 Registration Statement of The Money Tree Inc., Commission File No. 333-122531, on September 21, 2005 and incorporated herein by reference) |
| |
| 4.2 | | Form of debenture (filed as Exhibit 4.2 to the Form S-1 Registration Statement of The Money Tree Inc., Commission File No. 333-157701, on March 4, 2009 and incorporated herein by reference) |
| |
| 5 | | Opinion of Baker, Donelson, Bearman, Caldwell & Berkowitz, PC (filed as Exhibit 5 to the Form S-1 Registration Statement of The Money Tree Inc., Commission File No. 333-157701, on March 4, 2009 and incorporated herein by reference) |
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| | |
Exhibit No. | | Description |
| |
| 10.1 | | Agency Sales Agreement between The Money Tree Inc. and Interstate Motor Club, Inc. dated December 9, 1994 (filed as Exhibit 10.1 to the Form S-1 Registration Statement of The Money Tree Inc., Commission File No. 333-122531, on February 4, 2005 and incorporated herein by reference) |
| |
| 12 | | Statement regarding computation of ratios (filed as Exhibit 12 to the annual report on Form 10-K of The Money Tree Inc., Commission File No. 333-122531, on December 23, 2009 and incorporated herein by reference) |
| |
| 21 | | Subsidiaries of The Money Tree Inc. (filed as Exhibit 21 to the annual report on Form 10-K of The Money Tree Inc., Commission File No. 333-122531, on December 23, 2009 and incorporated herein by reference) |
| |
| 23.1 | | Consent of Carr, Riggs & Ingram, LLC |
| |
| 23.2 | | Consent of Baker, Donelson, Bearman, Caldwell & Berkowitz, PC (included in Exhibit 5) |
| |
| 24 | | Power of Attorney (filed as Exhibit 24 to the Form S-1 Registration Statement of The Money Tree Inc., Commission File No. 333-157701, on March 4, 2009 and incorporated herein by reference) |
| |
| 25 | | Statement of eligibility of trustee (filed as Exhibit 25 to the Form S-1 Registration Statement of The Money Tree Inc., Commission File No. 333-122531, on February 4, 2005 and incorporated herein by reference) |
The undersigned Registrant hereby undertakes:
| (1) | To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: |
| | (i) | To include any prospectus required by section 10(a)(3) of the Securities Act of 1933 (the “Act”); |
| | (ii) | To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; |
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| | (iii) | To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. |
| (2) | That, for the purpose of determining any liability under the Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
| (3) | To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. |
| (4) | That, for the purpose of determining liability under the Act to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness; provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use. |
| (5) | For the purpose of determining liability of the Registrant under the Act to any purchaser in the initial distribution of the securities, the undersigned Registrant undertakes that in a primary offering of securities of the undersigned Registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned Registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser: |
| | (i) | Any preliminary prospectus or prospectus of an undersigned Registrant relating to the offering required to be filed pursuant to Rule 424; |
| | (ii) | Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned Registrant or used or referred to by an undersigned Registrant; |
| | (iii) | The portion of any other free writing prospectus relating to the offering containing material information about the undersigned Registrant or its securities provided by or on behalf of an undersigned Registrant; and |
| | (iv) | Any other communication that is an offer in the offering made by the undersigned Registrant to the purchaser. |
Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange
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Commission (“SEC”) such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to file an application for the purpose of determining the eligibility of the trustee to act under subsection (a) of Section 310 of the Trust Indenture Act of 1939, as amended, in accordance with the rules and regulations prescribed by the SEC under Section 305(b)(2) thereof.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Post-Effective Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Bainbridge, State of Georgia, on January 11, 2010.
| | |
| THE MONEY TREE INC. |
| |
| By: | | /s/ Bradley D. Bellville |
|
| Bradley D. Bellville |
| President |
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment No. 1 to the Registration Statement has been signed by the following persons in the capacities indicated and on the dates indicated.
| | | | |
| Name | | Title | | Date |
| | |
/s/ Bradley D. Bellville Bradley D. Bellville | | President and Director (Principal Executive Officer) | | January 11, 2010 |
| | |
/s/ Steven Morrison Steven Morrison | | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | | January 11, 2010 |
| | |
/s/ Jefferey V. Martin Jefferey V. Martin | | Director | | January 11, 2010 |
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| | |
Exhibit No. | | Description |
| |
| 3.1 | | Articles of Incorporation of The Money Tree Inc. (filed as Exhibit 3.1 to the Form S-1 Registration Statement of The Money Tree Inc., Commission File No. 333-122531, on February 4, 2005 and incorporated herein by reference) |
| |
| 3.2 | | Amendment to Articles of Incorporation of The Money Tree Inc. (filed as Exhibit 3.2 to the Form S-1 Registration Statement of The Money Tree Inc., Commission File No. 333-122531, on February 4, 2005 and incorporated herein by reference) |
| |
| 3.3 | | Bylaws of The Money Tree Inc. (filed as Exhibit 3.3 to the Form S-1 Registration Statement of The Money Tree Inc., Commission File No. 333-122531, on February 4, 2005 and incorporated herein by reference) |
| |
| 3.4 | | Amendment to Bylaws of The Money Tree Inc. (filed as Exhibit 3.4 to the Form S-1 Registration Statement of The Money Tree Inc., Commission File No. 333-122531, on February 4, 2005 and incorporated herein by reference) |
| |
| 3.5 | | Amendment to Bylaws of The Money Tree Inc. (filed as Exhibit 3.5 to the Form S-1 Registration Statement of The Money Tree Inc., Commission File No. 333-157701, on March 4, 2009 and incorporated herein by reference) |
| |
| 4.1 | | Amended and Restated Indenture between The Money Tree Inc. and U.S. Bank National Association dated September 20, 2005 (filed as Exhibit 4.1 to Amendment No. 4 to the Form S-1 Registration Statement of The Money Tree Inc., Commission File No. 333-122531, on September 21, 2005 and incorporated herein by reference) |
| |
| 4.2 | | Form of debenture (filed as Exhibit 4.2 to the Form S-1 Registration Statement of The Money Tree Inc., Commission File No. 333-157701, on March 4, 2009 and incorporated herein by reference) |
| |
| 5 | | Opinion of Baker, Donelson, Bearman, Caldwell & Berkowitz, PC (filed as Exhibit 5 to the Form S-1 Registration Statement of The Money Tree Inc., Commission File No. 333-157701, on March 4, 2009 and incorporated herein by reference) |
| |
| 10.1 | | Agency Sales Agreement between The Money Tree Inc. and Interstate Motor Club, Inc. dated December 9, 1994 (filed as Exhibit 10.1 to the Form S-1 Registration Statement of The Money Tree Inc., Commission File No. 333-122531, on February 4, 2005 and incorporated herein by reference) |
| |
| 12 | | Statement regarding computation of ratios (filed as Exhibit 12 to the annual report on Form 10-K of The Money Tree Inc., Commission File No. 333-122531, on December 23, 2009 and incorporated herein by reference) |
| |
| 21 | | Subsidiaries of The Money Tree Inc. (filed as Exhibit 21 to the annual report on Form 10-K of The Money Tree Inc., Commission File No. 333-122531, on December 23, 2009 and incorporated herein by reference) |
| |
| 23.1 | | Consent of Carr, Riggs & Ingram, LLC |
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| | |
Exhibit No. | | Description |
| |
| 23.2 | | Consent of Baker, Donelson, Bearman, Caldwell & Berkowitz, PC (included in Exhibit 5) |
| |
| 24 | | Power of Attorney (filed as Exhibit 24 to the Form S-1 Registration Statement of The Money Tree Inc., Commission File No. 333-157701, on March 4, 2009 and incorporated herein by reference) |
| |
| 25 | | Statement of eligibility of trustee (filed as Exhibit 25 to the Form S-1 Registration Statement of The Money Tree Inc., Commission File No. 333-122531, on February 4, 2005 and incorporated herein by reference) |
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